Lagarde Says ECB Will Act at ‘Right Time’ But Only Gradually

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European Central Bank President Christine Lagarde repeated that officials won’t rush to remove stimulus in the euro region as she sought to highlight the limits of their powers at a time of volatile prices. 

“We need to be open about what we can and cannot do as a central bank,” she told European Parliament lawmakers on Monday. “For example, our monetary policy cannot fill pipelines with gas, clear backlogs at ports or train more lorry drivers.”

Facing the fastest inflation in euro zone history, Lagarde turned more hawkish after the ECB met last month, refusing to rule out an interest-rate hike in 2022. Some colleagues have since said such a scenario is possible, though others urge caution in responding to soaring prices that has prompted an aggressive response by the Bank of England. 

The ECB is already paring back pandemic-era stimulus and Lagarde last week warned that tightening monetary policy too quickly could jeopardize Europe’s economic recovery. Raising rates “would not solve any of the current problems,” she told Redaktionsnetzwerk Deutschland in an interview.

“Any adjustment to our policy will be gradual,” she said in Strasbourg on Monday. “Our target is an inflation rate of 2% over the medium term. To achieve this, we will take action at the right time.”

Money markets are pricing quarter-point hikes by the ECB in September and December.

Several ECB officials have stressed in recent days the need for the shift in policy to be gradual. Governing Council member Olli Rehn cautioned at the weekend against a strong reaction to short-term inflation, saying it’s better to look at price projections for 2023 and 2024 -- after the current energy spike and supply-chain disruptions die down.

European Commission forecasts last week point to inflation coming in at 1.7% next year -- still short of the ECB’s goal.

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