ECB’s Lagarde Reiterates Need to Raise Rates Several Times Even if Growth Slows Substantially

The Euro collapsed to a new 20-year low early Monday dragged down by a plunging British Pound, a right-wing victory in Italy’s general elections and expectations that aggressive rate hikes by the major central banks would send the global economy into recession.

On Monday, the EUR/USD settled at .9608, down 0.0080 or -0.83%. The Invesco CurrencyShares Euro Trust ETF (FXE) finished at $88.70, down $0.78 or -0.87%.

Monday’s Recap

Fear hit the Euro trade on Monday after the British Pound plunged to a record low early in the session in Asia, following last week’s announcement by the new U.K. government that it would implement tax cuts and investment incentives to boost growth.

In other news, Giorgia Meloni became Italy’s first woman prime minister as the head of its most right-wing government since World War Two after leading a conservative alliance to triumph at Sunday’s election.

According to Giada Giani, Economist at Citi, “Meloni’s first key decision will be the appointment of the finance minister, with a pro-Europe, fiscally-cautious personality looking a likely choice for now. We do not expect an immediate push for a major fiscal relaxation, but we do see risks over the medium term that the right’s policy agenda will clash with EU objectives.”

ECB’s Lagarde Says She Won’t Fix ‘Policy Errors’

The European Central Bank won’t use its latest emergency scheme to buy the bonds of countries that make “policy errors”, its President Christine Lagarde said on Monday in response to a question about Italy’s likely next government.

Asked in the European Parliament whether the ECB could deploy its Transmission Protection Instrument to help Italy, Lagarde wouldn’t name any country but said the scheme was only there to support fiscally prudent countries while others should apply for a bailout.

Lagarde was referring to the fact that Meloni’s government is inheriting one of the Euro Zone’s heaviest debt burdens at a time of rising borrowing costs and looming recession.

ECB President Lagarde Warns Against Inflation from Fiscal Stimulus

Lagarde, who is battling the highest inflation in the Euro Zone’s history, also said countries using their budget to protect citizens from high food and energy costs must be careful not to fuel further price growth.

“It is essential that fiscal support used to shield those households from the impact of higher prices is temporary and targeted,” Lagarde told a parliamentary hearing in Brussels. “This limits the risk of fueling inflationary pressures, thereby also facilitating the task of monetary policy.”

Lagarde also repeated the ECB’s most recent message that interest rates will need to rise over the next several policy meetings even as growth slows substantially.