The energy shock linked to the war on Iran “is too big to be ignored” by monetary policy, but “a measured response remains the right one to keep inflation under control”. The president of the ECB, Christine Lagarde, said this in her statement to the International Monetary and Financial Committee of the IMF which met today in Bangkok.
Lagarde explained that the ECB’s ‘reaction function’ is based on three criteria: the assessment of the inflation outlook and the risks surrounding it; the dynamics of underlying inflation; and the strength of monetary policy transmission. “The inflation outlook points to higher inflation in the future, especially in the short term, given the latest developments in energy markets. However, at this stage we see no evidence of a significant shift in energy prices to other prices and wages, beyond what is already included in our projections.”
And while growth has proven resilient, financing conditions have tightened, with long-term interest rates rising significantly since we last met. This will slow growth and reduce price throughput more than we anticipated in our September exercise.”