ECB’s Lagarde says stagflation is not the base case

STAGFLATION is not the most likely economic outcome for the euro area, even as the war in Ukraine slows growth and speeds inflation, according to European Central Bank (ECB) president Christine Lagarde. 

“Stagflation is not our baseline scenario presently,” Lagarde told the Slovenian newspaper Delo in an interview published Saturday (May 7).

“While extraordinarily large uncertainty could cause a slowdown in economic growth accompanied by high inflation, the current situation can’t be compared to that of the 1970s.”

Central bankers are faced with contradictory forces as Russia’s invasion pushes prices higher while sapping confidence among businesses and households. ECB officials are still determined to press on with normalizing monetary policy, with many holding out the possibility of a first interest-rate increase in July. 

On Friday, Bundesbank president Joachim Nagel said policy makers mustn’t wait too long to take such a step, while French ECB Governing Council member Francois Villeroy de Galhau said rates -- currently at -0.5% -- may turn positive this year. 

Lagarde reiterated that based on the data at hand, net asset purchases are expected to end “at the beginning of the third quarter.” Asked about interest rates, the ECB president said officials will keep “all options open” and progress gradually. BLOOMBERG