ECB's Major Shift: "Unlikely" to Always Ensure 2% Inflation

European Central Bank President Christine Lagarde recently stated at a meeting in Frankfurt that due to the current environment filled with "exceptionally high uncertainty," it is "unlikely" that the ECB will consistently ensure an inflation rate of 2% in the short term.

This statement marks a significant shift in the ECB's monetary policy and strengthens market doubts about the pace and frequency of future interest rate cuts. Previously, Lagarde had retracted her earlier guidance that the "direction forward"—i.e., further gradual rate cuts—was "clear." Following Lagarde's remarks, expectations for a rate cut in April have cooled, and several investment banks now anticipate that the magnitude of rate cuts before the end of the year will be smaller than previously predicted.

Lagarde emphasized that the 2% inflation target introduced by the ECB in 2021 is a medium-term goal that allows for deviations in the short term. She stated that the ECB's aim is to ensure that "inflation converges towards 2% in the medium term," a strategy that helps avoid overreacting to short-term or temporary shocks. She also mentioned that the ECB could "adjust the timeframe for returning to the inflation target" to respond to different economic environments.

Lagarde pointed out that the current uncertainty mainly stems from several factors: first, the increased public borrowing by European countries for defense and infrastructure investment may directly push up inflation; second, a trade war potentially triggered by the United States could increase inflation volatility.

She specifically noted that the Eurozone, due to its high dependence on global trade and energy imports, is more susceptible to these new types of shocks. For example, Germany and other Eurozone countries pushing defense and infrastructure spending through debt financing may trigger "new bidirectional shocks," which could both suppress and accelerate inflation.

"The direction of the shocks is harder to predict."

Lagarde warned that the recent surge in prices could lead to more unstable inflation expectations. She pointed out that once consumers notice rising inflation, their perception of inflation will react quickly, but when inflation begins to decline, this perception will recede more slowly. Therefore, the ECB will pay closer attention to inflation expectations, as long as households and businesses do not view future price increases as certain events, short-term supply shocks (such as rising energy prices) can be "ignored."

Regarding interest rate policy, Lagarde admitted that the ECB "cannot provide a clear path." She stated that the ECB will focus on clarifying how to respond to specific shocks and events, rather than providing a specific timetable for interest rate adjustments