In her speech given at Frankfurt University last Wednesday, the European Central Bank Chief Christine Lagarde joked that had she gave the speech a month ago it would been totally different. Today, she said, her team is updating their assessment on an hour by hour basis.
President Lagarde said that that the ongoing energy shock caused by the war in Iran can go two directions. If the shock doesn’t extend for a long time, it will be contained, allowing the ECB to wait for the effects to show in the data before taking any premeditated action. This approach is in line with a policy that acts based on data. In the case, if there is a deviation from the inflation target, the ECB can take measures gradually. Action may also may be taken to avoid impacts of lagging affects. However, a significant deviation would prompt the central bank to take forceful action.
She added that we are too early in the process to locate where we are on the spectrum and greater clarity is needed on how the conflict will proceed for a better assessment. She reiterated that the bank will not act prematurely without the necessary information but it will not hesitate to take action to preserve the 2% inflation target.
She also said that government policies can help mitigate the shock by limiting energy consumption and helping low-income households but these measures may also risk increasing demand and adding to inflation.
President Lagarde gave her assessment by comparing the economic context of 2022 and the energy shock caused by the Russian invasion of Ukraine. She highlighted that the economic conditions in 2022 were more tilted toward growth as economies bounced back from the Covid pandemic, but the economic environment today is more benign, meaning that the impacts of a longer-term shock today could be even more negatively impactful.
Earlier this month, the ECB Chief said that the central bank has plenty of tools to address any potential shocks.
You can find the full speech here.
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