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Despite the “painful” inflation spike, Lagarde urges the European Central Bank to be patient

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Christine Lagarde has said that the European Central Bank should remain “patient” and avoid premature tightening of policy, even though the euro zone inflation surge is “unwelcome and painful”, especially for the poor.

In a speech at the Frankfurt Bank Conference, the President of the European Central Bank said: “At a time when purchasing power has been squeezed by rising energy and fuel costs, excessive austerity will become an unnecessary headwind for economic recovery.”

Lagarde said: “When faced with a fleeting or supply-driven inflation shock, we must not rush to adopt premature tightening policies,” which means that even if other central banks withdraw their support, the European Central Bank may meet next month. To maintain large-scale stimulus measures.

Lagarde’s remarks suppressed the euro, and the exchange rate fell 0.7% against the US dollar to $1.284, close to a 16-month low. The euro also fell against other major currencies such as the pound and the yen. It hit a six-year low of 1.048 francs against the Swiss franc.

Because central banks such as the Federal Reserve and the Bank of England have adopted tighter policies on the recent surge in inflation.

Eurozone government bonds rose due to the prospect of longer-term easing of the European Central Bank’s policy, and was further boosted by news that Germany and Austria implemented new restrictions to curb the spread of Covid-19. The yield on German 10-year government bonds, the benchmark for Eurozone assets, fell 0.04 percentage points to minus 0.32%, the lowest level in two months.

Lee Hardman, a currency analyst at MUFG, said: “Understandably, the market is concerned about further Covid-related disruptions and the possible impact on growth.” “This will undoubtedly help Lagarde’s efforts to overthrow the European Central Bank’s early interest rate hike expectations.”

Last month, the Eurozone inflation rate reached a 13-year high of 4.1%, well above the European Central Bank’s 2% target, prompting some investors to bet that the European Central Bank will raise interest rates next year. But Lagarde said that many of the drivers of rising inflation, such as soaring energy prices and supply chain bottlenecks, “may fade in the medium term.”

“This kind of inflation is both unwelcome and painful-people naturally worry about how long it will last,” she added. “We take these concerns very seriously and follow developments closely.”

Lagarde said that the Eurozone economy is facing “multiple shocks, partly related to catching up with demand, but there are also strong supply drivers.” “Tightening policies prematurely will only make the squeeze on household income worse.

“At the same time, it will not address the root cause of inflation, because energy prices are set globally, and the European Central Bank’s monetary policy cannot compensate for the supply bottleneck,” she added.

Most investors expect the European Central Bank to state next month that its 1.85 trillion euro flagship bond purchase program launched last year in response to the pandemic will end in March 2022. However, it is widely expected that the central bank will take steps to simultaneously strengthen its long-term asset purchase program to limit any selling in the bond market.

With the promise not to raise interest rates before stopping the purchase of major bonds, the decision next month will provide an important signal for the potential time for the first interest rate hike.

Lagarde said that the European Central Bank may continue to buy bonds for most of next year, and said: “Even after the pandemic emergency is expected to end, monetary policy-including appropriate adjustments to asset purchases-to support economic recovery remains Very important. And inflation can continue to return to our 2% target.

She said: “We believe that the inflation rate cannot be self-sustained, either at the entire economic level or at the sectoral level. Therefore, today’s monetary policy must remain patient and persistent.” At the same time, maintain any destabilizing dynamics that may arise. alert. “

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