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ECB Lagarde: Doesn’t make sent to react to current inflation by tightening policy

In a speech, ECB President Christine Lagarde said that the central bank focus on “medium term, not on current inflation numbers”. “When inflation pressure is expected to fade – as is the case today – it does not make sense to react by tightening policy,” she added. “The tightening would not affect the economy until after the shock has already passed.”

Lagarde also said, “supply shock” will tend to “push up inflation and depress output. In this case, “tighter monetary policy would only exacerbate the contractionary effect on the economy.” The Eurozone is facing a “mixture of shocks”, partly related to catch-up demand but has a “strong supply-driven element”. “Tightening policy prematurely would only make this squeeze on household incomes worse.”

“The conditions to raise rates are very unlikely to be satisfied next year,” she said. “Moreover, even after the expected end of the pandemic emergency, it will still be important for monetary policy – including the appropriate calibration of asset purchases – to support the recovery and the sustainable return of inflation to our target of 2%.”

Full speech here.

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