In a speech today, ECB President Christine Lagarde highlighted the challenges posed by persistent high inflation and increasing uncertainty. She noted, “Since July last year we have raised interest rates by 350 basis points. However, inflation is still high, and uncertainty around its path ahead has increased. This makes a robust strategy going forward essential.”
Lagarde outlined a three-pronged strategy to tackle these issues:
- Data-dependent rate path: Emphasizing the importance of data dependency in times of high uncertainty, Lagarde stated, “This means, ex ante, that we are neither committed to raise further nor are we finished with hiking rates.”
- Liquidity support amidst market volatility: Acknowledging recent financial market turbulence, she assured, “We are ready to act and provide liquidity support to the financial system if needed.” Lagarde emphasized the ECB’s proven ability to “set the appropriate policy stance to control inflation and at the same time use other instruments to address risks to monetary policy transmission.”
- Clear reaction function: The third element focuses on continuous monitoring of three key inputs – inflation outlook, underlying inflation, and policy transmission. Lagarde explained, “The future calibration of the rate path will be determined by – and will require continuous monitoring of – these three key inputs.”
