Lagarde no longer believes that inflation will decline

Central bank conference in Sintra

ECB President Christine Lagarde and her US counterpart Jerome Powell.

(Image: via REUTERS)

Sintra Christine Lagarde is convinced that inflationary dynamics in the euro area have changed permanently. “I don’t think we will return to a low inflation environment,” the president of the European Central Bank (ECB) said in Sintra at a conference of his central bank on Wednesday.

There he talked about the latest developments and current challenges during a panel discussion with US Federal Reserve Chairman Jerome Powell, his British counterpart Andrew Bailey, and Bank for International Settlements (BIS) head Agustin Carstens.

Lagarde stressed that the ECB has had to contend with too low inflation and other framework conditions over the past decade. “But this is absolutely not what is happening now.” The Russian invasion of Ukraine will also change the environment in which the ECB operates. In the medium term, the head of the ECB hopes that the inflation rate will stabilize at the two percent target set by the central bank.

ECB chief Lagarde admits mistakes

Lagarde acknowledged that central banks need to look back on their past inflation forecasts with humility. Monetary authorities had long predicted a significant drop in inflation for this year.

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It is necessary to analyze what were the causes of the errors, admitted Lagarde. This is a “useful exercise”. From Lagarde’s point of view, the trend in energy prices, which had risen much more sharply than initially expected, played an important role.

Fed reaffirms interest rate policy

In May, the inflation rate in the euro area was 8.1 per cent. In the United States, consumer prices as measured by the consumer price index even increased by 8.6%.

US Federal Reserve Chairman Powell also said that today’s economy is “very different” than it was before the pandemic, with many supply shocks, higher inflation and strong global inflationary dynamics. Price stability is currently the top priority for the Federal Reserve (Fed), even at the risk of triggering a recession.

The central bank sees price stability with a long-term inflation rate of two percent. “The biggest risk to the economy would be if we fail to restore price stability,” the foreign exchange regulator said. The Fed’s goal is to raise interest rates without triggering a recession. “We believe this is possible.”

The Fed last raised the US benchmark interest rate by 75 basis points on June 15th. This was the biggest increase in three decades. Economists warn that the sharp tightening of monetary policy in the United States could trigger a recession.

Moreover: The return of the euro crisis: “The rate hike is dramatic”

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