Inflation risks tilted to upside, says ECB's Lagarde

Frankfurt

EUROPEAN Central Bank (ECB) president Christine Lagarde acknowledged on Thursday (Feb 3) that eurozone inflation was running hotter than expected and with risks tilted to the upside, but continued to forecast it would ease through this year.

Speaking after the ECB kept its policy unchanged as expected, Lagarde said policymakers would not rush into new moves, but also chose not to repeat her past comments that a rate hike this year was very unlikely. "Inflation is likely to remain elevated for longer than previously expected but to decline in the course of this year," she said.

"Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term," she added. "The situation has indeed changed."

Lagarde told reporters that while there was "unanimous concern" among ECB governing council members about inflation, they were also determined not to rush to any conclusions until more information was available.

While global peers such as the US Federal Reserve and the Bank of England tighten policy, the ECB earlier kept policy unchanged, staying on track to provide copious stimulus. Lagarde said January's higher-than-expected inflation rate of 5.1 per cent was predominantly down to the direct and indirect impact of a surge in energy costs, with higher food prices also weighing due to higher transport and fertiliser costs.

She said that while the impact of the pandemic was becoming less severe with each wave, national virus containment measures could still dampen activity. Without referring explicitly to tensions between Russia and the West over Ukraine, she said "geopolitical clouds" could also hit growth prospects.

The central bank has long argued that inflation will soon abate without its intervention and fall below its 2 per cent target by year-end, so withdrawing support now would be counterproductive. But financial investors and policymakers have started to question this, especially since the ECB has persistently underestimated the current spike, forcing it to repeatedly revise forecasts.

Markets already doubt ECB projections and are pricing in 28 basis points of rate hikes this year, with the first move seen in July, despite the bank's insistence that a move in 2022 is very unlikely. REUTERS