Lagarde warns against 'overreacting' on inflation

The president of the European Central Bank Christine Lagarde has urged caution when responding to surging inflation.

Inflation is on the rise across the UK, US and mainland Europe, driven by economies emerging from the pandemic but also surging energy costs and supply chain constraints.

Headline Eurozone inflation is currently at a near-ten year high of 3.0%, and most analysts expect that to hit fresh highs of around 3.3% when the latest figures are released on Friday.

The ECB target for inflation was traditionally “below but close to 2%” but it ditched that guidance in the summer. It is now targeting 2%, and has noted that it could tolerate temporary movement above that.

Inflation still remains well above the new guidelines, but speaking on Tuesday, Lagarde warned against withdrawing stimulus too quickly in response to a “transitory” spike in inflation.

She told the bank’s Forum on Central Banking there were “no signs that this increase in inflation is becoming broad based across the economy”.

She continued: “The key challenge is to ensure that we do not overact to transitory supply shocks that have no bearing on the medium term, while also nurturing the positive demand forces that could durably lift inflation towards are 2% inflation target.”

On Monday, Lagarde signalled that inflation could likely stay above the ECB’s target for the remainder of the year.