November 15th 2021
FRANKFURT – Eurozone inflation will stay elevated for longer than previously expected, European Central Bank President Christine Lagarde conceded Monday — but she stuck to her call that it will drop below the central bank’s 2 percent target over the medium term.
“We still see inflation moderating in the next year, but it will take longer to decline than originally expected,” Lagarde told MEPs on the Parliament’s economics committee.
Her comments suggest that the ECB will have to revise upward its inflation forecast at its December policy meeting, which would mark the sixth consecutive time it has had to do so.
Still, Lagarde stressed that the ECB’s Governing Council continues to see inflation dropping below the 2 percent target. “Despite the current inflation surge, the outlook for inflation over the medium term remains subdued,” she said.
She argued that inflation will remain transitory because even if wage growth feeds into higher prices next year, the risk of second-round effects remains limited — so the conditions for the bank announcing its first post-pandemic interest rate hikes are unlikely to be met next year.
Given the time lag with which monetary policy works, tightening interest rates now would do more harm than good, Lagarde added, noting that the effects would hit at a time when prices are expected to decline again in any case.
Even after the expected end of the pandemic emergency, “it will still be important that monetary policy — including the appropriate calibration of asset purchases — supports the recovery throughout the euro area and the sustainable return of inflation to our target of 2 percent,” she said.