ECB Reaffirms Commitment to Two Percent Inflation

(MENAFN) European Central Bank (ECB) President Christine Lagarde emphasized on Wednesday that the institution remains fully dedicated to maintaining its 2% medium-term inflation objective, even as it evaluates the repercussions of the energy disruption caused by the Middle East conflict.

Addressing attendees at a conference in Frankfurt titled The ECB and Its Watchers, Lagarde stated that policymakers would avoid hasty interventions until they have a clear understanding of the shock’s magnitude, duration, and persistence. She also highlighted that the ECB is prepared to act should inflation risks expand.

“The main message I want to convey is that our response will be rooted in our monetary policy strategy,” Lagarde remarked. She further explained: “Monetary policy cannot bring down energy prices. But we must identify when higher energy costs risk spilling over into broad-based inflation – be it through indirect effects or through second-round effects via wages and inflation expectations.”

Lagarde outlined that the ECB’s framework relies on three key principles: first, evaluating the characteristics of the shock before taking action; second, concentrating on potential risks and alternative scenarios rather than solely on the central forecast; and third, maintaining a flexible set of policy tools that can be adjusted according to the intensity, duration, and economic spread of the shock.

She noted: “Small, one-off and short-lived supply shocks can be looked through. But as expected deviations from our inflation target grow larger and more persistent, the case for action becomes stronger.”

Comparing the current energy shock to the 2021-2022 crisis, Lagarde described it as more manageable.

She pointed out that gas prices peaked at approximately €340 ($394.3) per megawatt hour in August 2022, while current prices hover around €60, and the broader economic environment is more favorable.

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