European Central Bank President Christine Lagarde appeared to downplay inflation concerns on Monday, arguing that price pressures could still subside before becoming entrenched and high energy costs would be a drag on prices further out.
Pointing to mounting inflation risks, the ECB opened the door last week to an interest rate hike later in 2022 and said that a March 10 meeting will be crucial in deciding how quickly the central bank would wind down its long-running bond-buying scheme, a cornerstone of its stimulus efforts.
But speaking to the European Parliament's Committee on Economic and Monetary Affairs, Lagarde appeared cautious, warning that the euro zone has in the past been "particularly vulnerable" to high energy costs, which weaken household spending power and thus reduce inflation over the medium term.
"We have to bear in mind that demand conditions in the euro area do not show the same signs of overheating that can be observed in other major economies,"
"This increases the likelihood that the current price pressures will subside before becoming entrenched, enabling us to deliver on our 2% target over the medium term," she said.
"The chances have increased that inflation will stabilize at our target. There are no signals that inflation will be persistently and significantly above our target over the medium term, which would require measurable tightening," she added.
While Lagarde herself did not commit last week to any decision, several policymakers argued that the first move will be to speed up an exit from the bond-buying scheme, which is due to run indefinitely but at least until October.
An interest rate increase could only come thereafter but quicker tapering could mean a raise, the first since 2011, before the end of the year.
"There is a defined sequencing between the end of our net asset purchases and the lift-off date," Lagarde said. "A rate hike will not occur before our net asset purchases finish."
"Any adjustment to our policy will be gradual," she added.
Markets now price around 50 basis points of rate hikes this year but economists are more cautious, with most predicting the first move either at the end of the year or early 2023.
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