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European Central Bank president Christine Lagarde said the ECB was likely to miss its 2 per cent inflation target more often in the future as policymakers are forced to wrestle with “exceptionally high” uncertainty.
A week after the central bank signalled a possible slowdown in cuts to borrowing costs after reducing its benchmark interest rate for the sixth time by a quarter point to 2.5 per cent, Lagarde warned that the environment had become so difficult that it would be “impossible” to guarantee that “headline inflation will always be at 2 per cent”.
The goal of the ECB would be to ensure that “inflation is always converging back towards 2 per cent over the medium term”, she told a conference on Wednesday.
Lagarde stressed that higher public borrowing to fund defence and infrastructure as well as a potential trade war involving the US “might feed into inflation more directly and increase volatility”.
The euro area may be particularly vulnerable “as we are highly exposed to some of the new types of shock” due to its large dependence on global trade and energy imports, she warned. Larger shocks may come with the risk that inflation could be more sticky, she added.
Escalating tariffs as well as a big debt-funded push to increase defence and infrastructure spending by Germany and other euro countries could create “new, two-sided shocks” that can either dampen or accelerate inflation, the ECB president said.
“The direction of shocks is much harder to predict,” she said.
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