Lagarde says era of shocks makes ECB’s inflation job harder

[FRANKFURT] European Central Bank President Christine Lagarde said abrupt shifts in global trade and the region’s defence architecture will make it harder to keep inflation stable.

Speaking at a conference in Frankfurt, Lagarde said the changes represent “two-sided shocks” that, along with climate change, complicate policymaking.

“Maintaining stability in a new era will be a formidable task,” she said on Wednesday (Mar 12). “It will require an absolute commitment to our inflation target, the ability to parse which types of shocks will require a monetary reaction and the agility to react appropriately.”

Officials are confident inflation will return to their 2 per cent target at the start of next year and are lowering interest rates to loosen the shackles on the eurozone’s struggling economy. They’re still gauging the effects of the barrage of tariffs from US President Donald Trump’s administration alongside Europe’s ramp-up in military outlays.

“Trade fragmentation and higher defence spending in a capacity-constrained sector could in principle push up inflation,” Lagarde said. “Yet, US tariffs could also lower demand for EU exports and redirect excess capacity from China into Europe, which could push inflation down.”

Regardless of the shocks, “we must set our policy appropriately so that inflation is always converging back towards 2 per cent over the medium term,” she said.

The ECB will reveal the results of a review of its monetary-policy strategy in the second half of 2025. While less wide-ranging than an earlier exercise that ended in 2021, it may still have significant implications for future rate action and crisis response.

Officials are investigating how best to act should supply shocks happen more regularly. In the past, they tended to widely disregard such occurrences on the basis that they only stoke price growth temporarily. But recent years have shown that if there’s a risk of such events becoming larger and more persistent, price expectations can deviate from target regardless of whether the shocks are supply- or demand-driven.

Critics say the ECB erred in 2021 by judging that the spike in inflation was temporary. They also say it acted too slowly to raise rates and halt net asset purchases the following year.

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“Within a well-articulated strategy and an unwavering commitment to price stability, we will need to retain agility to respond to complex circumstances as they arise,” Lagarde said. BLOOMBERG