Christine Lagarde distanced the European Central Bank from the trend of tightening monetary policy by many other central banks, promising not to “overreact to [the] transient supply shocks âleading to higher inflation.
The ECB president said policies aimed at moving countries towards a low-carbon economy could fuel further price pressures, as evidenced by the recent spike in gas prices. But she said in the eurozone there was still “no sign of this increase in inflation becoming generalized.”
“The main challenge is to ensure that we do not overreact to transient supply shocks that have no impact in the medium term,” said Lagarde.
Other Western central banks, including the US Federal Reserve and the Bank of England, have recently signaled a move towards tightening monetary policy in response to a recent spike in inflation. Norway’s central bank hiked interest rates last week, alongside similar moves in Pakistan, Hungary, Paraguay and Brazil.
However, Lagarde sent a different message in his opening speech at the ECB’s annual central bank forum.
“Monetary policy must remain focused on safely exiting the economy from the pandemic emergency and raising inflation sustainably towards our 2% target,” she said. Lagarde added that the ECB “will continue to provide the conditions necessary to fuel the recovery”.
Krishna Guha, vice chairman of Evercore ISI, a consultancy firm, said that Lagarde’s speech “appears intended to push back against the idea that the ECB will be dragged down by a global reversal of the tide as the Fed turns moderately hawkish and the Bank of England is becoming strongly hawkish â.
Inflation in the eurozone hit a decade-high 3 percent in August, well above the ECB’s 2 percent target. Economists say it could reach 4% by November, due to rising energy prices, supply chain bottlenecks and resurgent demand – although they expect inflation to subside next year.
Lagarde said much of the recent acceleration in inflation was due to “base effects” caused by a comparison to ultra-low inflation levels last year.
âOnce these pandemic-induced effects have passed, we expect inflation to decrease,â she said. “Monetary policy should normally ‘look through’ temporary supply-induced inflation, as long as inflation expectations remain anchored.”
Wholesale gas prices have more than quadrupled in Europe this year, contributing to a sharp increase in wholesale electricity prices and disrupting sectors that depend on gas byproducts, such as fertilizer manufacturers and manufacturers. food packaging.
Lagarde cited a forecast from the Network for Greening the Financial System, a club of financial supervisors and watchdogs, that green policies could increase inflation by 1 percentage point over time.
But she added that if carbon tax revenues were not used to mitigate the impact of rising energy prices on households, it “could reduce purchasing power and lead to changes in the economy. relative prices that lower core inflation “.
This month, the ECB slowed the pace of its bond purchases in response to falling funding costs, but government bond yields have since risen in anticipation of monetary tightening. Investors are waiting for the ECB to announce in December its intention to end its â¬ 1.85 billion bond purchase program and publish inflation forecasts for 2024.