Christine Lagardepresident of the ECBlaunched the alarm: it will be extremely difficult to maintain the goal of theInflation at 2% in the current economic context.
Donald Trump’s duties on European goods on one side and not yet dormant war winds that will push EU nations to greater investments in the defense could have effects on inflation. Which in turn would have effects on ECB’s monetary policies.
Christine Lagarde on inflation
U.S. duties on European imports are expected, they could have a double effect: on the one hand to do increase priceson the other hand reduce the demand for exports EU, with possible deflationary effects.
Lagarde underlines that, yes, the ECB will continue in its constant commitment for price stability, trying to adapt to new critical issues. But nevertheless the eurozone, which is strongly dependent on trade and energy imports, is particularly exposed to new economic shocks.
In this scenario “of economic and geopolitical uncertainty” defined as “exceptionally high” the leaders of the ECB cannot “ensure that inflation will always be 2%”. So said Christine Lagarde in his intervention at the 25th edition of the Conference The Ecb and Its Watchers In Frankfurt.
Hence the invitation to the central bankers who “will have to demonstrate agility in adapting their orientation and their tools to changes in circumstances, as well as having intellectual curiosity to question the consolidated principles and conventional wisdom”.
There are two unknowns on the horizon: one concerns the possibility that the fragmentation of exchanges can destabilize the market. Then there is the energy node, with the euro area that strongly depends on energy imports: geopolitical tensions could determine greater volatility in exchange rates and energy prices and raw materials.
Because inflation must remain at 2%
In the period from the great financial crisis resulting from the outbreak of the war in Ukraine, which had its main effects on the energy market, the ECB acted by raising rates to counter growing inflation. This has made it more expensive to take money on loan
2% inflation is judged optimal from central banks. Inflation is the value that indicates the purchasing power of the currency. An inflation greater than 2% (which translates into a surge in prices) slows down consumption and impoverishes the community. An inflation of less than 2% (deflation) pushes families and companies to postpone expenses and investments in the hope of spending even less. 2% fixed inflation is therefore considered the ideal balance point.
What happens if inflation increases
If international uncertainty were to gallop inflation, the ECB would react raising the rates.
There would be an immediate effect on mortgages: i variable rate mortgagesdepending on the Euribor, they would see their installments increase. The fixed rate mortgages already stipulated would remain anchored to the conditions established at the time of the signature, while less advantageous conditions would be seen on the fixed mortgages of new stipulation.
As for the loansthe families They would find less advantageous to buy in installments since rates would make funding more expensive. The companies They would slow down their investments, given the greatest costs in accessing credit.
But a higher inflation would immediately translate into a loss of purchasing power over wagesfor which automatic and immediate adjustment is not foreseen, and consequently on purchases and revenue for the state of VAT.
