ECB’s Lagarde: So Far, Don’t See Material Risk of Stagflation

28 March 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Saturday denied any ‘material risk’ that the euro area would enter stagflation due to the Russian war of aggression against Ukraine.

In an interview with Cypriot daily Phileleftheros, Lagarde said that the war would ‘have a considerable impact on the global economy, and especially on the European economy due to Europe’s proximity to Russia and dependence on Russian gas and oil.’

Short-term effects in the euro area include lower growth and higher inflation she said, but the total impact hinges on the duration of Russian aggression.

‘Our baseline projections, which include an early assessment of the impact of the war, don’t foresee a recession, given the euro area’s strong labour market and the fading pandemic’, she said, reiterating the ECB’s updated projections and alternative scenarios.

‘But there’s a lot of uncertainty around these estimates’, she added.

‘So far, incoming data don’t point to a material risk of stagflation’, she said, noting the strength of the labour market.

What the ECB will do is ‘entirely data-dependent’, she said. ‘Our forward guidance is very clear about the conditions that we need to see before we would consider raising interest rates.’

Optionality was more important than ever, she said. The ECB would end net asset purchases in 3Q if medium-term inflation appears set to hold up, but could also extend and/or expand the purchases if ‘the outlook changes and financing conditions deteriorate in a way inconsistent with our 2% inflation target’, she said.

However, she observed, ‘[i]t is also important to stress that, in all our scenarios, inflation is expected to decrease and settle at levels around our 2% target in 2024.’