ECB's Lagarde: Inflation expectations do not point to risks of prolonged overshooting

The European Central Bank (ECB) President Christine Lagarde, speaking at a forum this Tuesday, said that we will only react to improvements in headline inflation that we are confident are durable.

Key quotes:

There is a risk that higher carbon pricing might reduce purchasing power and lead to relative price changes that push down underlying inflation.
We still need an accommodative monetary policy stance to exit the pandemic safely and bring inflation sustainably back to 2%.
The key challenge is to ensure that we do not overreact to transitory supply shocks that have no bearing on the medium term.
The typical nature of the recovery is creating frictions in the economy, which can produce opposing effects on growth and inflation.
Once these pandemic-driven effects pass, we expect inflation to decline.
We expect to see further progress toward an even tighter alignment between the expected time of lift-off for our policy rates and the most likely inflation outlook
Monetary policy should normally “look through” temporary supply-driven inflation.
We are monitoring developments carefully but, for now, we see no signs that this increase in inflation is becoming broad-based across the economy.
Once the pandemic emergency comes to an end, our forward guidance on rates, as well as purchases under the asset purchase programme, will ensure that monetary policy remains supportive.
Inflation expectations also do not point to risks of prolonged overshooting.
Monetary policy must remain focused on steering the economy safely out of the pandemic emergency and lifting inflation sustainably towards our 2% target.
Looking beyond the pandemic, we expect inflation to only slowly converge towards 2%.

Market reaction:

The comments did little to provide any impetus to the shared currency or lend any support to the EUR/USD pair, which remained depressed near below the 1.1700 mark amid stronger USD.

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