Open to reactions: Lagarde expects falling inflation

Open to reactions
Lagarde expects inflation to fall

ECB President Lagarde continues to take a wait-and-see attitude on the subject of inflation. Overall, she expects the situation to ease, but wants to keep a close eye on the data. At the same time, she agreed to an adjustment of the forecast.

Despite the expectation that inflation will subside, the ECB is basically open to a change of course in monetary policy. At the moment, however, it is not foreseeable that inflation will spiral out of control via a wage-price spiral, said the President of the European Central Bank, Christine Lagarde, at the online forum “Davos Agenda”. The ECB is assuming that the strong inflation will gradually recede. “But that doesn’t mean we don’t have to be open to changes in the inflation outlook.”

Monetary policy is dependent on the data. New projections by the ECB economists are due as early as March. “It could look different,” said the French. If that were to happen, the ECB would have to look at its roadmap for further monetary policy action. In any case, the ECB will also look at other instruments after the end of the bond purchases – interest rate increases are one of them. However, Lagarde has repeatedly emphasized that an increase in the current year is very unlikely.

Energy costs drive prices

Driven by high energy costs, inflation in the euro zone has recently risen to five percent. The rate of inflation is now more than twice as high as the ECB’s target, which is targeting a rate of two percent as the optimal value for the economy in the medium term. The monetary authorities are internally at odds with regard to the inflation outlook.

As the minutes of the December interest rate meeting show, the discussion revolved around whether the inflationary phase could be longer than expected. In the December projections for 2022, the ECB economists predicted an average inflation rate in the monetary union of 3.2 percent. In 2023 it should then fall to 1.8 percent and remain at this level in 2024.

IMF chief Kristalina Georgieva said on the online forum that it was important for monetary authorities to align their monetary policy with the data and communicate it clearly. She believes that the US Federal Reserve is also aware of the tightrope walk that it has to master in the fight against inflation and to maintain the economic recovery. A tightening of monetary policy could trigger problems in countries that are heavily indebted in dollars. The already weak recovery in some states could also be dampened further by a tighter line from the Fed.

China warns the Fed

The leadership in Beijing is also aware of this. China’s President Xi Jinping recently warned that if industrialized countries applied the brakes or even reversed monetary policy, there would be negative consequences for global economic and financial stability: “And developing countries would bear the brunt.

Observers expect the two-day Fed meeting ending on Wednesday to set the course for an interest rate turnaround that is likely to take place in March. The financial markets expect up to four steps upwards in the current year. The currency guardians are confronted with an inflation rate of seven percent recently.

In Japan, the situation on the price front is much more relaxed: The nationwide core consumer price index rose by 0.5 percent in December compared to the previous year. This means that the central bank’s goal is still a long way off. Central bank chief Haruhiko Kuroda said at the Davos forum that monetary policy would remain extremely stimulating: “We are not afraid of inflation because inflation is so low.”

source site-32