Business

Christine Lagarde rules out stagflation in the eurozone

European Central Bank President Christine Lagarde believes that high inflation coupled with ongoing stagnation is not the “benchmark” on which the institution leans.

Christine Lagarde does not want stagflation, high inflation combined with prolonged stagnation, in the eurozone. This isn’t the “benchmark” the institution is leaning towards, she says, fueling the debate for another first-class raise.

“While the unusual degree of uncertainty could mean a combined slowdown in growth and high inflation, the current situation is unlike that of the 1970s,” said Christine Lagarde. in an interview for the Slovenian daily Delo.

Such a scenario known in the past and labeled “stagflation” is “not our reference at the moment,” argued the former French economy minister.

The oil shock in the early 1970s had collapsed the economy – by eight percentage points – and inflation was higher than today.

In addition, a spiral of wage increases in response to inflation had begun, fueling it, which “we (…) don’t see today,” she added.

A situation incomparable to that of the oil shocks of the 1970s

His message temporarily interrupts a series of communications in the circles of central bankers in the eurozone, where everyone has spent the past week giving their sense of the right time to decide on a first rate hike.

This will be an important step in the ongoing process of normalizing accommodative monetary policies in response to crises, especially those related to Covid-19 from 2020 onwards.

The institute has already phased out the massive debt buyback launched in 2015 to counter the extremely low inflation.

These repayments should be reduced to zero “at the beginning of the third quarter” (in net terms), Christine Lagarde said, and the adjustments in key rates “will take place some time later and will be gradual”.

This leaves open the possibility to debate a first rate hike – since 2011 – at the last monetary policy meeting before the summer recess, scheduled for July 21, as proposed by several members of the ECB, such as Isabel Schnabel, member of the Governing Council.

The guardians of the euro have to decide mainly according to the evolution of the war in Ukraine.

This war “is primarily a human tragedy” that also “has economic consequences outside Ukraine”: it “presses growth and fuels inflation,” Christine Lagarde insisted.