The ECB Forum on Central Banking is taking place in Sintra, Portugal. During her speech, Christina Lagarde, President of the ECB, said that Inflation in the euro area is undesirably high, and it is projected to stay that way for some time to come, and has stated that this is a great challenge for our monetary policy.
Lagarde has talked about external shocks that have created this scenario of inflation. She puts first emphasis on the consequences of the war in Ukraine, supply chain disruptions and the energy dependence which made prices of energy to rise up. As she states, together, energy, food and industrial goods account for around 80% of the overall inflation rate seen since the start of this year. The second external shock is the recovery in internal demand as the economy has reopened after the pandemic. This rebound in spending has seen services inflation rise to 3.5% in May.
The ECB’s President remarks the uncertainty about how persistent this inflation is likely to be. As she states, we are not facing a straightforward situation of generalised excess demand or economic overheating, in which case the trajectory of medium-term inflation would have been clearer. And says, that despite the bounceback in services, private consumption in the euro area is still more than 2% below its pre-pandemic level, and investment remains subdued.
There will also be implications of these shocks for growth and, as such, they can weigh on the medium-term inflation outlook, she says.
Talking about an interest rate normalisation, she said that based on the overall outlook, the process of normalising our monetary policy will continue in a determined and sustained manner. But given the uncertainty we still face, the pace of interest rate normalisation cannot be defined ex ante.
However, she says that the ECB expects to raise the key interest rates again in September, and “if the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” And beyond September, the Governing Council has agreed that a “gradual but sustained” path of further rate increases will be appropriate.
As a conclussion, she said, the ECB is unwavering in its commitment to ensure that inflation returns to 2% over the medium term, and says that the Bank has designed a strategy to normalise a policy that allows them to respond nimbly to the high inflation environment. She points out that the central bank will ensure that the orderly transmission of the Bank’s policy stance throughout the euro area is preserved.