(Bloomberg) -- European Central Bank President Christine Lagarde said abrupt shifts in global trade and the region’s defense architecture will make it harder to keep inflation stable.
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Speaking at a conference in Frankfurt, Lagarde said the changes represent “two-sided shocks” that, along with climate change, complicate policymaking.
“Maintaining stability in a new era will be a formidable task,” she said Wednesday. “It will require an absolute commitment to our inflation target, the ability to parse which types of shocks will require a monetary reaction and the agility to react appropriately.”
Officials are confident inflation will return to their 2% target at the start of next year and are lowering interest rates to loosen the shackles on the euro zone’s struggling economy. They’re still gauging the effects of the barrage of tariffs from US President Donald Trump’s administration alongside Europe’s ramp-up in military outlays.
“Trade fragmentation and higher defense spending in a capacity-constrained sector could in principle push up inflation,” Lagarde said. “Yet US tariffs could also lower demand for EU exports and redirect excess capacity from China into Europe, which could push inflation down.”
Regardless of the shocks, “we must set our policy appropriately so that inflation is always converging back towards 2% over the medium term,” she said.
At present, Lagarde added, the ECB is considering various scenarios on how trade tariffs and fiscal-spending plans will affect growth and inflation.
A footnote to that remark stated that “there needs to be clarity that the central bank will respond appropriately in the event of large market disruptions.” The ECB has a “strong track record” in supporting financial markets with liquidity at times of stress, as well as two backstop programs, it said.
The ECB will reveal the results of a review of its monetary-policy strategy in the second half of 2025. While less wide-ranging than an earlier exercise that ended in 2021, it may still have significant implications for future rate action and crisis response.
Officials are investigating how best to act should supply shocks happen more regularly. In the past, they tended to widely disregard such occurrences on the basis that they only stoke price growth temporarily. But recent years have shown that if there’s a risk of such events becoming larger and more persistent, price expectations can deviate from target regardless of whether the shocks are supply- or demand-driven.