ECB’s Lagarde: Will Take Time to Get Enough Data to Exclude Risks of Above-Target Inflation

1 July 2024

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will need time to be convinced that the threat of too-high inflation has subsided, ECB President Christine Lagarde said Friday.

In a speech at the opening reception of the ECB Forum on Central Banking, Lagarde said that labour market strength allowed the ECB to be unhurried, but that policymakers also had to keep uncertain prospects for economic activity in mind.

‘Now, we are still facing several uncertainties regarding future inflation, especially in terms of how the nexus of profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks’, she said. ‘And it will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed.’

She continued: ‘The strong labour market means that we can take time to gather new information, but we also need to be mindful of the fact that the growth outlook remains uncertain. All of this underpins our determination to be data dependent and to take our policy decisions meeting by meeting.’

The ECB’s work was ‘not done, and we need to remain vigilant’, she said. Still, the central bank had ‘come a long way’ in its effort to restore price stability, she said.

According to Lagarde, the ECB had needed to guard against a disanchoring of expectations by stressing its insistence on the ‘timely’ return to price stability. This was intended to make clear that high inflation was temporary and that seeing to this was a matter of urgency, she said.

In gauging the inflation outlook, the ECB’s reaction function does not encompass solely the macroeconomic projections, she said. The ECB considers various indicators of underlying price pressures and measures policy transmission strength by looking at the impact on banks, capital markets and the real economy, she said.

‘As a result, while the flow of new information constantly adds to and improves our picture of medium-term inflation, we are not pushed around by any specific data point’, she said. ‘Data dependence does not mean data point dependence.’

In view of the size of the preceding inflation shock, it was ‘still not guaranteed’ that the economy would experience a soft landing, she said.

The ECB would in any case ‘not waver from our commitment to bring inflation back down’, she vowed.