Lagarde: We're not going to do anything about inflation

For the time being, the ECB will Do nothing to curb inflation. This is what Christine Lagarde, president of the central bank, said on Friday. According to her, high inflation in the eurozone is temporary and a tightening of monetary policy would do more harm than good. By tapering the bond-buying program or raising interest rates, it would harm the recovery of the economy.

Inflation in the eurozone rose to 4.1% in October, the highest level since 2008. Now, as then, the rise in energy prices plays an important role in the rise in the price of goods. The difference with 2008 is that there are now also logistical problems. As a result, there is a scarcity of certain goods and raw materials, resulting in price increases. Transport costs have also risen sharply, especially for container transport by sea.

Inflation in the euro area (Source: Trading Economics)

According to Lagarde, all these factors are temporary and do not justify an adjustment of monetary policy. Not even with inflation more than twice as high as the 2% target. She says:

"When inflationary pressures are expected to ease again - as is the case now - then it makes no sense to respond with a tightening of monetary policy. That tightening would only have an effect after the inflation shock has passed."

Buy-back programme remains

The ECB will decide on its bond-buying programme on 16 December. The emergency programme (PEPP), which was launched at the beginning of the corona crisis, is still planned to be phased out. But that does not mean an end to the buying of government bonds, because that will continue under the old support program. Lagarde said:

"Even after the expected end date of the pandemic emergency purchase programme (PEPP), it remains important for monetary policy to support the economy and bring inflation towards our 2% target. This also includes the calibration of the buy-back programme."

Earlier this week Wrote We already know that the ECB is facing a major dilemma with its bond-buying programme. When it phases out the support measures, the interest rates of the southern euro countries will rise. If it sticks to its bond-buying programme, it will be more difficult to achieve the inflation target. The ECB is putting its credibility on the line by buying even more bonds now that the economy is growing and inflation has already risen too far.

Flight forward?

Lagarde opts for a flight forward, hoping that inflation will soon go away. But whether that will happen remains to be seen. If prices rise fast enough, it can take on its own dynamics. People can adjust their spending habits accordingly, by converting even more money into assets that governments cannot print. Think of stocks and cryptocurrencies, but also precious metals such as gold and silver. These are instruments with which people can protect their assets against a further erosion of the purchasing power of money.

This contribution was made from Geotrendlines