Effects of pandemic have not yet played out fully, says European Central Bank chief, urging monetary policy patience
High inflation rates are likely to rise further until the end of the year but monetary policy must remain patient and persistent as the climbing prices will probably slow down, the head of the European Central Bank (ECB) said on Friday.
“We are still in a phase where the economy is reopening and the effects of the pandemic have not yet fully played out,” said ECB President Christine Lagarde in a speech at the 31st Frankfurt European Banking Congress.
She said rising energy prices, supply bottlenecks and the withdrawal of virus-driven restrictions were leading to remarkable friction in some sectors.
“This inflation is unwelcome and painful and there are naturally concerns about how long it will last,” she stressed, adding that the ECB was closely monitoring developments.
She also said that the main drivers of inflation should be identified in order to comprehend how monetary policy should respond in the current circumstances.
“Those drivers are likely to fade over the medium term, which is the horizon that matters for monetary policy. And, because they largely stem from the supply side and energy prices, they will probably slow the pace of the recovery in the near term.”
She also said inflation was rising even as growth was losing momentum in the near term, as supply disruptions constrain production and higher energy prices eat into demand.
The ECB has set a target to ensure inflation stabilizes at a 2% target in the medium term.
Inflation in the euro area saw 4.1% this October, up from 3.4% in September.
The bank also expects real gross domestic product (GDP) to surpass its pre-pandemic levels in the fourth quarter of 2021 two quarters earlier than was previously estimated at the beginning of the year.