The head of the European Central Bank (ECB) Christine Lagarde said that in the event of a further increase in consumer inflation, the ECB may reconsider the pace of monetary policy tightening. The latest ECB forecasts suggest that in 2022 the overall CPI will be 6.8% per annum, which is more than three times higher than the ECB's target level (2%).
Investors are extremely concerned about high inflation and are closely monitoring the ECB's actions. In addition, investors express concerns about the high level of debt in Europe and that a return to a tighter monetary policy may become a financial constraint for a number of EU economies. At its June meeting, the ECB signaled that it would raise the rate at a meeting in July, and then again in September. Traders have already taken into account a 0.25% rate increase in pricing, but they see only a 25% probability of a 0.5% rate increase in July.
"It is obvious that there are conditions in which gradualism is inappropriate. If, for example, we see higher inflation threatening inflationary expectations, or signs of a more permanent loss of economic potential, which limits the availability of resources, we will need to quickly abandon accommodative policies,” Lagarde said.
As for ECB's new instrument to eliminate the risk of fragmentation in the eurozone, the ECB head stated that he will have to contain safeguards to preserve sound fiscal policy among member states. She said it will allow rates to rise “as far as necessary,” complementing efforts to stabilize inflation at the 2% target.