ECB’s Lagarde: War Means Higher Inflation, But Also Threatens Growth; ECB to Act as Needed

30 March 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Wednesday reiterated key points pertaining to monetary policy and the economic outlook.

In a speech at an event organised by the Central Bank of Cyprus, Lagarde said that Russia’s war of aggression against Ukraine would boost inflation via higher-for-longer energy prices, more expensive food and global manufacturing bottlenecks.

However, via reduced purchasing power and confidence on the part of households and lower investment by companies, the war is also a threat to growth, she said.

‘Clearly, the longer the war lasts, the higher the economic costs will be and the greater the likelihood we end up in more adverse scenarios’, she said. ‘This is why we are continually monitoring the incoming data and updating our analysis accordingly.’

Lagarde called on fiscal policy to mitigate the fallout from the war while promising that the ECB ‘will take whatever action is needed to pursue price stability and safeguard financial stability.’

Monetary policy could deal with the high uncertainty by relying on optionality, gradualism and flexibility, she said. Optionality, she said, meant being guided by data, so that net asset purchases under the asset purchase programme (APP) would end in 3Q if it were evident that medium-term price stability could stand up to the withdrawal of support, with the possibility otherwise of expanding or extending the programme.

Gradualism meant moving cautiously and modifying the policy stance according to feedback, she said, while flexibility referred to the use of all instruments to safeguard the transmission mechanism.