ECB Won’t Be ‘Paralyzed by Hesitation’ on Iran, Lagarde Says

cpmt[ep{6x3htm634k3[vt{g_media_dl_2.png ECBArticle content(Bloomberg) — The European Central Bank will act decisively and swiftly if the current surge in energy costs risks a broader bout of inflation, though for now it’s still assessing the shock caused by the Iran war, according to President Christine Lagarde.Sign In or Create an AccountEmail AddressContinueor View more offersArticle contentWhile the situation is different from 2022, when Russia’s invasion of Ukraine ultimately sent consumer-price growth into double digits, there are “reasons for vigilance,” Lagarde said Wednesday in a speech.Article contentWe apologize, but this video has failed to load.Try refreshing your browser, ortap here to see other videos from our team.Article contentArticle content“We will not act before we have sufficient information on the size and persistence of the shock and its propagation,” she told the ECB Watchers Conference in Frankfurt. “But we will not be paralyzed by hesitation: our commitment to delivering 2% inflation over the medium term is unconditional.” Article contentTop StoriesGet the latest headlines, breaking news and columns.There was an error, please provide a valid email address.Sign UpBy signing up you consent to receive the above newsletter from Postmedia Network Inc.Thanks for signing up!A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.Article contentSoaring energy costs brought on by the conflict in the Middle East are stoking fears of another inflation spike like the one four years ago. Bundesbank chief Joachim Nagel and others have signaled borrowing costs may need to be lifted as soon as April if the price outlook sours further. Article content“We are prepared, if appropriate, to make changes to our policy at any meeting,” Lagarde said.Article contentLagarde laid out three cases on how the ECB should to the current situation.Article content“If the energy shock is seen to be limited in size and short-lived, the classical prescription of looking through should apply. Transmission lags mean that a monetary-policy response would arrive too late and risk being counterproductive.”“If the shock gives rise to a large though not-too-persistent overshoot of our target, some measured adjustment of policy could be warranted. The optimal response to such a deviation is smaller when the cause is exogenous supply disruptions rather than strong demand, but it is not necessarily zero.” “Moreover, to leave such an overshoot entirely unaddressed could pose a communication risk: the public may find it difficult to understand a reaction function that does not react.”“If we expect inflation to deviate significantly and persistently from target, the response must be appropriately forceful or persistent. Otherwise, self-reinforcing mechanisms would kick in and the risk of de-anchoring would become acute.”Article contentArticle contentInflation that had been at risk of undershooting 2% just a few weeks ago now looks set significantly surpass that target in the months ahead. Last week’s ECB’s baseline scenario foresees consumer prices advancing 2.6% this year. In an extreme outcome where disruptions to energy supplies persist, inflation would hit 6.3%.Article contentCostlier oil and gas could also derail Europe’s economy. Data on Tuesday showed private-sector activity in the currency bloc rising at the slowest pace since last May.Article contentLagarde said historical evidence suggests the risk of broad pass-through from energy prices “is the exception rather than the rule” in the euro area. But that picture may change due to the intensity and duration of the shock as well as its propagation, which depends on the macroeconomic environment.Article content“It is essential to identify as early as possible when the shock is at risk of broadening,” she said, stressing the ECB’s “agility.”Article contentThe signs at the moment aren’t good, with Lagarde cautioning that with attacks on the energy infrastructure in the Gulf region “the likelihood of a quick normalization is diminishing.”Trending JPMorgan sees 'national security risk' in old grid networks PMN Business Posthaste: Canada's troubled housing market just got hit with another headwind News Despite growing financial pressures, Canadians are still reliably paying their mortgages Mortgages Smith calls for new southbound pipelines, says U.S. could call 'first dibs' on Canadian oil exports Oil & Gas Oil and gas supply chain is about to snap, warns energy economist Peter Tertzakian Oil & Gas Article contentThat could mean firms and workers react faster this time than four years ago, when the ECB was heavily criticized for underestimating the dangers and acting even later than many peers.Article contentNagel told Bloomberg last week that the 2022 experience “will play an important role” — even if the ECB finds itself in a better starting position today, with inflation significantly lower and policy settings neutral rather than accommodative. Article content“We have a more recent memory of high inflation, which could affect how quickly costs are passed on and compensation is sought,” Lagarde said. “We are prepared, if appropriate, to make changes to our policy at any meeting.”Article contentShare this article in your social networkCommentsYou must be logged in to join the discussion or read more comments.Create an AccountSign in Join the Conversation Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information. JPMorgan sees 'national security risk' in old grid networks PMN Business Posthaste: Canada's troubled housing market just got hit with another headwind News Despite growing financial pressures, Canadians are still reliably paying their mortgages Mortgages Smith calls for new southbound pipelines, says U.S. could call 'first dibs' on Canadian oil exports Oil & Gas Oil and gas supply chain is about to snap, warns energy economist Peter Tertzakian Oil & Gas