Lagarde Says ECB Torn Between Risk of Acting Too Early, Too Late

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(Bloomberg) — The European Central Bank is carefully weighing its response to the Iran war and the impact on inflation to ensure it acts neither prematurely nor too late, President Christine Lagarde told Spain’s RTVE.

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Policymakers face “massive uncertainty” and need “a lot more data” to understand the repercussions of the conflict, Lagarde said in an interview broadcast on Saturday. She declined to be drawn on whether the ECB will raise interest rates next month, as many expect.   

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“We are constantly torn between the risk of reacting too quickly or the risk of reacting too late, and we have to find the right path to navigate our economies toward that 2% medium term inflation, which is our goal,” she said. 

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After holding borrowing costs unchanged on April 30, the ECB signaled that a rate increase will be considered in June. Slovak central bank chief Peter Kazimir has since said such a move is “all but inevitable,” while others have struck a more cautious tone, highlighting the need to assess more data. 

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The fighting in the Middle East and the accompanying surge in energy costs have already pushed up inflation to 3%, with further increases likely. At the same time, it’s started to weigh on economic activity. Data on Friday showed an unexpected drop in industrial production in Germany, the region’s largest economy.

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European Union Economy Commissioner Valdis Dombrovskis warned this week that Europe is facing “a stagflationary shock.” While that puts the ECB in a tricky spot, most analysts and investors expect a hike in June, with the latter anticipating at least one more move before year-end.

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“Markets are looking at the same things we do, and they try to anticipate as well,” Lagarde said. At the ECB, “we’re all trying to do the best job we can in figuring out how we bring inflation back to 2%. That’s the big difference between markets, which do not have that imperative.”

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She added that “our decision will be predicated on the depth, the length and the repercussions of the crisis that we are suffering” and that “we need — before we take any decision — a lot more data, a better understanding of where prices are going, a good understanding of what repercussions it has on indirect cost, on salary negotiations.” 

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—With assistance from Carlos Caminada.

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