European Central Bank will not overreact to fleeting inflation
FRANKFURT, Germany (AP) – Europe’s current inflationary surge is temporary and will not cause the European Central Bank to ‘overreact’ by withdrawing stimulus or raising interest rates, said Tuesday the President of the ECB Christine Lagarde.
“What we are seeing now is mainly a phase of temporary inflation linked to the reopening,” Lagarde said in a speech in Frankfurt, Germany, opening the ECB’s annual central bank forum.
Lagarde reviewed reasons such as supply bottlenecks that temporarily pushed up prices, and so-called base effects, the result of unusually low inflation during the period of the previous year due to very low oil prices and tax breaks at the height of the pandemic. While longer-term forces could push inflation higher or lower, Lagarde was clear that the current run of higher readings would not move the bank from its stimulus posture.
“The main challenge is to ensure that we do not overreact to transient supply shocks that have no impact in the medium term,” she said. She said monetary policy must also continue to “maintain positive demand forces that could drive inflation up over the long term” towards the bank’s goal of a sustainable rate of 2%.
The ECB’s position contrasts with that of the US Federal Reserve, who signaled that he could announce as early as November that he will start withdrawing the extraordinary support he unleashed after the coronavirus crippled the economy. The United States has recovered faster than Europe, which still has not recovered to pre-pandemic production levels.
Annual inflation stood at 3% in August, but the ECB and private sector economists predict that figure will decline in 2022, as the previous year’s comparisons are removed from the statistics. This left the ECB to examine the recent price spikes that accompanied the easing of restrictions imposed during the pandemic. The bank has yet to signal an exit plan from its extraordinary stimulus package, which includes a € 1.85 trillion ($ 2.15 trillion) bond purchase program that is expected to roll out in the less until March 2022, nor for its record interest rates of zero for loans to banks and less 0.5% for demand deposits that the ECB takes from banks.
The economy of the 19 countries that use the euro grew 2.2% in the second quarter compared to the previous quarter as the euro area emerged from a double-dip recession. The ECB now believes the economy will return to its pre-COVID-19 size by the end of this year, three-quarters earlier than the bank expected in December.