Lagarde urges reforms; stable expectations can push governments to delay reacting to high inflation

Brussels –Reforms instead of rate hikes; acting before others move. Christine Lagarde, defending the record of the European Central Bank, which she leads, and fending off criticism, speaks at the Central Bank Forum in Sintra. She delivers a long, detailed speech, in which she includes a clarification that sounds like a warning and a rebuke, suggesting that if policymakers act in time and with determination, the ECB might not even have to take measures that would weigh on households and businesses. This is because interest rate rises affect those who need loans, whether for a home or for business.

She targets those who sit idle and rest on their laurels. “Stable longer-term expectations can potentially lead policymakers to delay responding to inflation that is already above target and being felt by households and firms, even when forecasts and incoming data would call for action,” Lagarde said. In other words: governments only take action in the face of full-blown crises or shocks. It is true, the ECB President continues, that “if policymakers act to pre-empt a future de-anchoring, there is no reliable way to gauge how far rates need to be raised, or to know after the fact whether a pre-emptive response was necessary or excessive.” 

Reforms are needed to protect against difficult times, and Lagarde makes this clear when she states that “there are reasons to believe that European policy responses are also reducing how far shocks pass through to the real economy.” An example of this is the Iberian Peninsula and the sustainability agenda. “The clean energy transition is also beginning to alter how those shocks are transmitted to the broader economy,” the ECB President noted with regard to high energy costs caused by the war in Iran. “In countries with higher shares of low-carbon electricity, like Portugal and Spain, wholesale electricity prices have increasingly decoupled from gas prices.”