Christine Lagarde President of the European Central Bank downplayed fears about Eurozone stagflation, despite Russia’s invasion of Ukraine starting to weigh on the economy while further record gains in consumer prices keep surging.
The difficulty for central banks is to maintain price stability without hurting activity, Lagarde said.
The war will have consequences for growth as inflation quickens and confidence is damaged, Lagarde told a conference today in Paris.
When asked about the risk of stagflation, Lagarde said that even in the harshest scenario, with a boycott of gas and petrol and a worsening of the war that goes on for a long time, even in those scenarios we have 2.3% growth.
“We are not seeing elements of stagnation now,” she said.
Despite the economic risks stemming from the conflict. The remarks come after this month’s surprise move by the ECB to quicken the pace at which it removes stimulus in a bid to tame record-high inflation.
Lagarde reinforced today that the ECB has increased its room to maneuver by also weakening the link between the end of asset purchases and the start of interest-rate hikes.
Before Lagarde spoke, money markets today brought forward wagers on hikes and are now betting on two by December. While some have approved the added flexibility, others have struck a more hawkish tone, with the Netherlands’ Klaas Knot saying two increases in record-low rates are possible in 2022.
She reiterated that Europe and the U.S. aren’t in the same phase of the economic cycle, with the euro zone also more exposed to the war just across its border.
Lagarde declined to discuss the ECB’s monetary-policy stance, but conceded that it won’t move at the same pace as the U.S., where the Federal Reserve last week kicked off what’s set to be a cycle of rate increases.
“We are in different universes, at a different stage in the cycle, with different starting points,” Lagarde said. “We in the euro area are at negative rates, while the U.S. never went below zero.”
With central banks limited in their ability to rein in energy costs, there’s a greater responsibility for governments to intervene. The OECD estimated last week that a targeted fiscal boost of 0.5% of gross domestic product could help cushion the war’s economic fallout without fueling prices pressures.
“All countries are in the process of putting in place plans, which are unfortunately not very targeted, that provide general support for extra energy spending that citizens will be confronted with,” Lagarde said. “So I have strong doubts the fiscal effort will be neutral.”
Lagarde urged government support to be targeted at less wealthy households, something she considers hasn’t happened so far in some countries.