ECB Won’t Allow Repeat of Last Inflation Shock, Lagarde Says
TL;DR
ECB President Christine Lagarde vows to prevent the Iran conflict from causing inflation spikes like the Ukraine war, citing better economic resilience and a commitment to control prices. The bank remains cautious amid market volatility and uncertainty, avoiding rushed decisions on interest rates.
Key Takeaways
- •The ECB aims to avoid a repeat of the high inflation seen after Russia's invasion of Ukraine by proactively managing economic shocks from the Iran conflict.
- •Lagarde emphasizes the ECB's improved capacity to absorb shocks and its readiness to take necessary actions to keep inflation under control.
- •Uncertainty and market volatility are delaying immediate policy changes, with the ECB adopting a wait-and-see approach ahead of its upcoming meeting.
- •New economic forecasts will include alternative scenarios to address the impact of the Middle East crisis, guiding potential interest rate decisions.
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The European Central Bank will ensure the war in Iran doesn’t inflict the same inflation pain on the euro zone as Russia’s invasion of Ukraine did, according to President Christine Lagarde.
“We are in an economic situation that’s different, we are in a better situation and we have a greater capacity to absorb shocks,” she told France 2 on Tuesday. “We will do all that is necessary to ensure inflation is under control and French and Europeans don’t suffer the same inflation increases like those we saw in 2022 and 2023.”
The situation in energy markets has triggered concerns that inflation — which had settled at the ECB’s 2% target — could flare up again. That in turn could lead to interest-rate hikes.
Traders have ramped up bets on monetary tightening since the war started at the end of February. But having at one stage priced two quarter-point hikes in the ECB’s deposit rate this year, wagers have been pared back to less than one after President Donald Trump signaled this week that the conflict may soon end.
Policymakers have shown willingness to stay agile, but indicated that there’s currently no urgency to change borrowing costs.
“Today, there is so much uncertainty that I’d be incapable to say precisely what we will decide” at the March 18-19 policy meeting, Lagarde said. “We won’t rush into a decision because there is too much uncertainty, too much volatility.”
Such market gyrations were on display this week: Oil contracts soared in heavy volumes to a peak of almost $120 a barrel in the first few hours of trading on Monday, to highs last seen in the middle of 2022. Then the mood abruptly shifted — forcing traders to make a dramatic turn.
“We have a degree of uncertainty and a degree of volatility that is absolutely surprising and doesn’t have an equivalent in 2022,” Lagarde said, adding this “makes managing the situation difficult.”
Next week’s ECB meeting will feature new quarterly forecasts, whose base assumptions may have been rendered obsolete by the Middle East crisis. In similar cases in the past, the ECB accompanied its estimates with additional scenarios — and Lagarde indicated they’ll use that option again this time.
“We model, we say ‘What do we do in this case? How do we react? Should we increase interest rates?’” she said. “That’s the work we will do, that we’re already doing and that we’ll continue to do as long has we have this uncertainty and volatility.”
Lagarde also rejected the suggestion that Europe is headed toward stagflation.