Brexit has made Britain's inflation problem worse, says Christine Lagarde

Britain’s inflation problems are worse because Brexit has drained the UK workforce, Christine Lagarde said as the European Central Bank stuck to its ultra-loose monetary stance.

“I don't want to take a political stand, but I think that there was a lot of non-UK labour force that eventually had to leave the United Kingdom, which has not been totally replaced,” the ECB president said.

“The shortage of work is actually having a bearing on the forces of the labour market in the UK.”

Her comments came after data showed consumer price inflation across the eurozone rose to 5.1pc in January – more than two and a half times the ECB target, and barely behind the 5.4pc reading for the UK in December.

Ms Lagarde said the “critical difference” between Britain and the eurozone from a central bank perspective was the former’s history of “much higher inflation”.

The ECB announced it would keep interest rates at record lows and maintained its plan to phase stimulus efforts out slowly this year, However, Ms Lagarde struck a hawkish tone during comments to the press, acknowledging inflation could prove higher than expected over the long term.

Its governing council left rates unchanged despite pressure to act after data on Wednesday showed inflation in the eurozone had risen to a record high.

Officials confirmed plans to end net buying under its pandemic-era quantitative easing programme in March. The ECB said interest rates will not go up until price rises are in line with its 2pc target.

Bank of America declared “the hawks have won” in Frankfurt, predicting the ECB would put rates up in September.

“Today's meeting was not even remotely balanced, it was hawkish,” said BofA economist Ruben Segura-Cayuela. “The doves have thrown the towel.”

Ms Lagarde’s comments at the press conference after the ECB decision was announced stirred markets up. The refusal to rule out rate rises this year sent the euro and bond yields sharply higher, knocking stocks and ending sterling’s brief stint at a two-year high against the single currency.

Krishna Guha from investment advisor Evercore said the comments were “notably more hawkish than expected”.

“Notably, Lagarde declined an invitation to repeat her refrain that the ECB is unlikely to raise rates this year ahead of the new projection exercise and emphasized the need for flexibility and optionality,” he said.

Holger Schmieding from Berenberg said “the hurdle for the ECB to raise rates this year remains high” despite a division between doves and hawks in Frankfurt.