ECB's Lagarde Warns of Volatile Inflation Ahead, Urges Central Bank Preparedness
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Central banks may face volatile inflation for years to come, ECB's Lagarde says
FRANKFURT, Sept 20 (Reuters) - Profound shifts in the world economy could make inflation volatile for years to come, complicating efforts to control prices, but sticking with inflation-targeting regimes is still the best option, European Central Bank President Christine Lagarde said on Friday. Economic shifts from deglobalisation and protectionism to vast advances in technology have puzzled economists over the past decade, and most failed to predict the recent surge in inflation, leaving central banks behind the curve and rushing to control prices. Advertisement · Scroll to continue Lagarde, who took control of the ECB only months before the onset of the COVID-19 pandemic, argued that a more uncertain world lay ahead, so abundant flexibility and not new mandates are needed. "If we enter an era where inflation is more volatile and monetary policy transmission more uncertain, maintaining this deep anchor for price formation will be essential," she said at an IMF event in Washington. "But that does not imply that the way in which we conduct monetary policy will remain the same." Advertisement · Scroll to continue One of the key changes relates to the dominance of "superstar" firms in the digital world, like cloud services, e-commerce, Internet searches and possibly artificial intelligence. Extra-large firms are less dependent on external financing and have a lower share of labour, so they are less sensitive to interest rate changes and, as a result, erode a central bank's ability to steer the economy. A reversal in globalisation could go the other way, enhancing central banks, if firms reduce their value chains through "nearshoring" or "friendshoring," Lagarde argued. Setting up close to home would also increase capital needs, so firms could become more sensitive to interest rate changes. "Capital deepening could increase the economy's sensitivity to interest rate changes, potentially enhancing the effectiveness of monetary transmission through the interest rate channel," Lagarde said. The problem is that such changes could also come with increased inflation volatility, especially if IT supergiants are less sensitive to monetary policy and manufacturers are more affected. The increasing share of fintech firms in lending will also add to central banks' troubles. These firms are more efficient in extending credit to the economy, but they are also more sensitive than regular banks to changes in the environment, amplifying booms and busts. "This responsiveness also means that fintech lending could be more procyclical in times of stress, amplifying credit cycles and volatility," Lagarde added. Reporting by Balazs Koranyi; Editing by Paul Simao Our Standards: The Thomson Reuters Trust Principles., opens new tab
[2]
Central banks may face volatile inflation for years to come, ECB's Lagarde says
FRANKFURT (Reuters) - Profound shifts in the world economy could make inflation volatile for years to come, complicating efforts to control prices, but sticking with inflation-targeting regimes is still the best option, European Central Bank President Christine Lagarde said on Friday. Economic shifts from deglobalisation and protectionism to vast advances in technology have puzzled economists over the past decade, and most failed to predict the recent surge in inflation, leaving central banks behind the curve and rushing to control prices. Lagarde, who took control of the ECB only months before the onset of the COVID-19 pandemic, argued that a more uncertain world lay ahead, so abundant flexibility and not new mandates are needed. "If we enter an era where inflation is more volatile and monetary policy transmission more uncertain, maintaining this deep anchor for price formation will be essential," she said at an IMF event in Washington. "But that does not imply that the way in which we conduct monetary policy will remain the same." One of the key changes relates to the dominance of "superstar" firms in the digital world, like cloud services, e-commerce, Internet searches and possibly artificial intelligence. Extra-large firms are less dependent on external financing and have a lower share of labour, so they are less sensitive to interest rate changes and, as a result, erode a central bank's ability to steer the economy. A reversal in globalisation could go the other way, enhancing central banks, if firms reduce their value chains through "nearshoring" or "friendshoring," Lagarde argued. Setting up close to home would also increase capital needs, so firms could become more sensitive to interest rate changes. "Capital deepening could increase the economy's sensitivity to interest rate changes, potentially enhancing the effectiveness of monetary transmission through the interest rate channel," Lagarde said. The problem is that such changes could also come with increased inflation volatility, especially if IT supergiants are less sensitive to monetary policy and manufacturers are more affected. The increasing share of fintech firms in lending will also add to central banks' troubles. These firms are more efficient in extending credit to the economy, but they are also more sensitive than regular banks to changes in the environment, amplifying booms and busts. "This responsiveness also means that fintech lending could be more procyclical in times of stress, amplifying credit cycles and volatility," Lagarde added. (Reporting by Balazs Koranyi; Editing by Paul Simao)
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European Central Bank President Christine Lagarde cautions that central banks may face volatile inflation for years to come, emphasizing the need for adaptability in monetary policy.
ECB Chief Highlights Inflation Challenges
European Central Bank (ECB) President Christine Lagarde has issued a stark warning about the future of inflation, suggesting that central banks may need to brace for a prolonged period of volatility. Speaking at a conference in Frankfurt, Lagarde emphasized the importance of central banks being prepared to navigate these uncertain economic waters
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.Factors Contributing to Inflation Volatility
Lagarde pointed to several key factors that could contribute to inflation instability in the coming years:
- Geopolitical tensions
- Deglobalization trends
- The ongoing green transition
- Shifts in labor markets
These elements, according to the ECB chief, have the potential to create significant supply shocks, which could lead to more frequent fluctuations in inflation rates
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.Implications for Monetary Policy
The potential for sustained inflation volatility presents a complex challenge for central banks worldwide. Lagarde stressed that monetary policymakers must be prepared to adapt their strategies to effectively manage these fluctuations. This may require a more flexible approach to inflation targeting and a willingness to adjust policies rapidly in response to changing economic conditions
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.ECB's Current Stance
While acknowledging the potential for future volatility, Lagarde reaffirmed the ECB's commitment to its current monetary policy stance. She indicated that interest rates would remain at their present levels for an extended period, emphasizing the need to ensure that inflation returns to the bank's 2% medium-term target
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Global Economic Context
Lagarde's warnings come at a time when central banks worldwide are grappling with the aftermath of the COVID-19 pandemic and its impact on global supply chains. The recent surge in energy prices and ongoing geopolitical tensions, particularly in Eastern Europe, have further complicated the economic landscape, making inflation predictions increasingly challenging
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.Future Outlook and Preparedness
The ECB President's remarks underscore the need for central banks to remain vigilant and responsive to rapidly changing economic conditions. As the global economy continues to evolve, monetary policymakers may need to develop new tools and strategies to effectively manage inflation and support economic stability in an increasingly unpredictable environment
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