European Central Bank President Christine Lagarde downplayed fears of stagflation in the euro zone, even as Russia’s invasion of Ukraine began to weigh on the economy while fueling already record gains in consumer prices.
The war will have “impacts” on growth as inflation rises and confidence is damaged, Ms Lagarde told a conference in Paris on Monday. The difficulty for central banks is maintaining price stability without hampering activity, she said.
Asked about the risk of stagflation, Ms Lagarde said that “even in the direst scenario of second-round effects, with a gas and petrol boycott and an intensification of the war that has been going on for a long time – even in these scenarios we have growth of 2.3 percent. “
“We don’t see any elements of stagnation now,” she said.
The comments follow the ECB’s surprise move this month to accelerate the pace at which it is withdrawing stimulus in a bid to tame record inflation – despite economic risks stemming from the conflict.
By weakening the link between the end of asset purchases and the start of rate hikes, the ECB has increased its room for maneuver, officials said, a point Ms Lagarde reiterated on Monday.
While some have touted this extra flexibility, others have taken a more aggressive tone, with the Netherlands’ Klaas Knot saying two hikes in record-low interest rates are possible in 2022.
Before Ms Lagarde spoke, money markets pulled ahead bets on hikes on Monday and are now placing two through December.
Ms Lagarde declined to discuss the ECB’s monetary policy stance but acknowledged it will not move at the same pace as the US, where the Federal Reserve started a cycle of rate hikes last week.
She reiterated that Europe and the US are not at the same stage of the economic cycle and that the eurozone is also more exposed to war right on its border.
“We are in different universes, in different phases of the cycle, with different starting points,” Ms. Lagarde said. “We in the Eurozone have negative interest rates while the US has never gone below zero.”
With central banks limited in their ability to contain energy costs, governments need to step up their game. The OECD estimated last week that a targeted tax hike of 0.5 percent of gross domestic product could help cushion the economic fallout from the war without fueling price pressures.
Ms Lagarde urged government support to target less affluent households, something she says hasn’t happened in some countries so far.
“All countries are unfortunately in the process of putting in place unfocused plans that offer broad support for additional energy spending that citizens are facing,” she said. “So I have strong doubts that the fiscal effort will be neutral.”
https://www.independent.ie/business/world/lagarde-says-eurozone-economy-to-grow-despite-impact-of-war-41469986.html Lagarde says euro zone economy will grow despite the impact of the war