ECB’s Lagarde: Inflation spike is ‘largely transitory’

The European Central Bank will continue aiding the euro-area economy as the fallout from the pandemic lingers, President Christine Lagarde said at an International Monetary Fund event on Saturday. 

“Monetary policy will continue supporting the economy in order to durably stabilize inflation at our 2% inflation target over the medium term,” Lagarde said in the 2021 Per Jacobsson Lecture at the International Monetary Fund on Saturday.

“The ECB is committed to preserving favourable financing conditions for all sectors of the economy over the pandemic period,” she said, according to a prepared text released by the ECB. 

She also said, however, that “Inflation is largely transitory”, adding, ''once the pandemic emergency comes to an end, which is drawing closer, our forward guidance on rates, as well as asset purchases, will ensure that monetary policy remains supportive of the timely attainment of our target.”

ECBs Klaas Knot spoke on Sunday in a TV interview and also sees inflation temporary. 

Market implications

Will the markets buy into this move dovish rhetoric from the ECB's governor or will it take the view that inflation appears to be less transitory? 

The ECB rolled out a 1.85 trillion-euro ($2.15 trillion) emergency scheme to support the region during the Covid period. That program is due to end in March which is yet to support the euro in any meaningful way. In fact, EUR/USD broke below the 200-day moving average mid-Sep. 

Instead, traders might be more inclined to note that the central bank is already preparing to transition to post-pandemic stimulus. ''It is studying a new bond-buying program to prevent any market turmoil once when crisis purchases end, officials familiar with the matter told Bloomberg last week''.