Lhe European Central Bank (ECB), engaged in monetary tightening to fight inflation, must do everything to prevent the effects of price rises from “embedding” permanently, said its president, Christine Lagarde, on Tuesday. In an economic environment deeply disrupted by the effects of the pandemic and the war in Ukraine, “monetary policy cannot prevent the first effects of many of these shocks. But she can guarantee that they do not become encrusted. This is what the ECB does,” said Christine Lagarde in a speech in Frankfurt.
“We will not let this phase of high inflation influence economic behavior and create a lasting inflation problem”, added the president of the monetary institution, acknowledging that the rise in prices in the euro zone “has proven much higher and more persistent than originally expected”. Christine Lagarde believes that the double shock of the pandemic and the Russian invasion of Ukraine “have caused turning points in our economic environment”, which will have persistent consequences on the structure of supply and demand.
The consequences of the war in Ukraine
“The cut in gas supplies due to the Russian invasion has become a major structural change that will have ramifications for several years”, she described in particular, with fossil fuel prices “likely to be higher during some time “. “If energy prices are permanently higher during the transition, this could have an impact on industrial production in Europe, affecting both supply and prices”, analyzes Christine Lagarde. Similarly, “globalization is changing”, due to the disruption created by the Covid-19 pandemic which has disrupted international supply chains.
READ ALSOArtus – Inflation: fighting evil… with evil
“While I doubt we are seeing de-globalization, companies are likely to hold higher inventories permanently and shorten their supply chains,” says the former French minister. Another consequence according to her: a possible “relocation of energy-intensive production” outside the euro zone. These structural supply-side changes “are an important factor that makes above-target inflation persist for longer,” she admitted. Inflation reached a record 9.1% in the euro zone in August.
In September, the ECB took a historic step by suddenly raising its key rates by 75 basis points, unheard of since the entry into force of the euro. The ECB intends to continue these rate hikes. “Adjusting the pace of rate hikes is a key tool to signal our determination to fulfill our mandate and contain inflation expectations. And going faster at the start of the upward cycle clearly reflects our commitment to bringing inflation back to our medium-term target, “around 2%, assured Christine Lagarde.