ECB President Warns of Overreaction to Inflation Shock

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The European Central Bank (ECB) must be careful not to reduce the corona support measures to steer the economy through the crisis too quickly in response to rapidly rising inflation.

 

ECB President Christine Lagarde reiterated that the inflation spike is temporary and that there are no signs that currency depreciation is “broad-based” in the economy.

Consumer price growth in the eurozone is currently 3 percent. That is one percentage point above the ECB’s target. Inflation is expected to rise further before the situation returns to normal. The ECB expects inflation to average just 1.5 percent in 2023.

According to Lagarde, speaking at the ECB forum in Portugal, the main challenge now is not to overreact to price increases that she believes will have no impact in the medium term. “Once these pandemic effects are over, we expect inflation to subside,” she said. Lagarde stated that half of the headline inflation is currently due to rising energy prices.

Higher inflation now threatens to limit economic growth. The rising prices ensure that companies pass on the costs. In turn, consumers are hesitant to spend money. Europe’s economic recovery has already lost momentum recently due to supply chain problems and a slowdown in the services sector due to the introduction of tougher corona measures after an initial uptick in the virus.

Policymakers at the ECB expect economic growth to continue, with support measures being phased out next year. More information about this will be announced in December. In addition, the ECB’s emergency program of nearly 1.9 trillion euros for bond-buying expires at the end of March.

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