ECB’s President Lagarde: Inflation could turn out higher than the baseline
Christine Lagarde, President of the European Central Bank (ECB), gave a statement at the fifty-third meeting of the International Monetary and Financial Committee (IMF) on Friday. She claimed that the uncertainty surrounding the outlook for the Eurozone inflation has increased significantly following the outbreak of the war in the Middle East.
Key takeaways:
The uncertainty surrounding the outlook for Euro area inflation has increased significantly following the outbreak of the war in the Middle East.
Risks to the outlook are tilted to the upside, especially in the near term.
Inflation could turn out higher than the baseline, in particular if inflation expectations and wage growth were to rise in response more than expected.
We are closely monitoring the situation.”
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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