ECB remains “vigilant”. Lagarde: “Soft landing not guaranteed”

The Eurozone is experiencing a period of “profound changes” characterized by the “lack of certainties” on the future, but the ECB has still managed to “chart a path through this uncertainty and has made a long way in the fight against inflation“. This is what President Christine Lagarde stated, opening the ECB Forum at the Portuguese Central Bank, in Sintra, warning that “our work is not finished, we must remain vigilant.”

“Our decisions they managed to keep inflation expectations anchored and inflation is expected to return to 2% in the latter part of next year,” Lagarde recalled, after recalling the difficult path of inflation decline over the past year, culminating in the decision in June to cut interest rates.We won’t stop until the game is won and inflation will not have returned to 2%,” he assured.

The risks: large and persistent shocks

“In a typical political cyclewhen the fluctuations are driven by moderate and short-lived shocksinflation expectations are usually not at risk,” the president explained, adding that, when shock they become “wider and more persistent”“the expectations of inflation can to unmoor” and central banks must “react forcefully” to prevent above-target inflation from consolidating.

Lagarde recalled that in this cycle “the shocks have been quite large to induce many families to shift their attention to inflation” and the inflationary impact “risked becoming endogenously persistent” due to the staggered wage bargaining process in the euro area. “Therefore, the monetary policy had to send a strong signal that no permanent overshoots of the inflation target would be tolerated”

The path taken by the ECB is the right one

Having examined the path of rates undertaken on this occasion by the ECB, Lagarde admitted that “communicating our commitment to reach the objective would not have been sufficient” and therefore “moderate political action would have been insufficient”for example by keeping rates at 2%.

“When we started to raise rates, we knew that we were far from where we needed to be“, admitted the number one of the Eurotower, adding that it was necessary “bridge the gap as quickly as possible“.

“When official rates moved into restrictive territory – he continued – the challenge has shifted from acting quickly to precisely calibrating the path” and this required “adopting a different approach compared to the past”.

“We have built a picture to protect us from this uncertainty, by combining the projections with current data on underlying inflation and monetary transmission,” Lagarde explained, adding “this framework It helped us to deal with the ‘tightening’ and ‘maintenance’ phases of our political cycle and gave us the confidence to implement a first rate cut at our last policy meeting.”

The cost of a restrictive policy

“On the one hand, our political path has contributed to tame inflationon the other hand also has slowed down economic growth”the President noted, recalling that “the economy has remained stagnant for five consecutive quarters”.

There third specific feature of this cycle indicates that “given the size of the shock to inflation, a ‘soft landing’ is not yet guaranteed“If we look at historical rate cycles since 1970,” he explained, “we can see that when major central banks raised interest rates while energy prices were high, the costs to the economy were usually quite high.”

“This cycle so far has not followed the patterns of the past” – Lagarde reiterated – “inflation has peaked much higher than in previous soft landings, but has also decelerated more rapidly” and “employment has grown despite slowing GDP growth”.