Lagarde: It is impossible for the ECB to always achieve the targeted inflation

European Central Bank President Christine Lagarde stated that the ECB is likely to miss its two percent inflation target more frequently in the future as policymakers are forced to contend with ‘exceptionally high’ uncertainty.

A week after the central bank signaled a possible slowdown in the reduction of borrowing costs, having cut its benchmark interest rate for the sixth time by a quarter point to 2.5 percent, Lagarde warned that the environment has become so challenging that it would be ‘impossible’ to guarantee that ‘overall inflation will always be at two percent’.

Lagarde noted that the ECB’s goal was to ensure that ‘inflation always approaches back to two percent in the medium term’. She also emphasized that increased public borrowing to finance defense and infrastructure, as well as a potential trade war involving the U.S., ‘could more directly impact inflation and increase volatility’.

– The euro area could be particularly vulnerable given that we are highly exposed to some of the new types of shocks due to our significant dependence on global trade and energy imports – she warned, adding that larger shocks could come with the risk that inflation could be ‘stickier’.

The escalation of tariffs, as well as the significant goal of increasing allocations for defense and infrastructure as demanded by Germany, could create ‘new dual shocks’ that may dampen or accelerate inflation, the ECB president said, concluding that it is now much harder to predict the direction of shocks.

Many misses by the ECB

Although the ECB chief now states that the situation is unpredictable due to geopolitical tensions, the ECB has not historically distinguished itself with its moves.

For instance, the ECB has previously underestimated inflation growth, especially after the COVID-19 pandemic and the war in Ukraine. For example, in 2021, they forecasted a temporary rise in inflation, while it became a more persistent problem, leading to aggressive interest rate hikes in 2022 and 2023.

Additionally, during the European debt crisis, the ECB maintained high interest rates for some time, which deepened the recession in some eurozone countries. Only later did they adjust their policy and introduce unconventional measures such as negative interest rates and quantitative easing. So while their guidelines may be useful, history shows that they are often wrong. They have frequently been overly optimistic regarding inflation and the speed of economic recovery, and at times have reacted too slowly to changes.