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The European Central Bank must not rush into a premature tightening when faced with passing or supply-driven inflation shocks, President Christine Lagarde said on Friday.
At the 31st Frankfurt European Banking Congress 2021, she said tightening policy prematurely would only make the squeeze on household incomes worse.
At the same time, such action would not address the root causes of inflation, because energy prices are set globally and supply bottlenecks cannot be remedied by the ECB's monetary policy.
A supply shock will tend to push up inflation and depress output. In this situation, tighter monetary policy would only exacerbate the contractionary effect on the economy, Lagarde observed.
Further, the banker noted that monetary policy affects the economy with a lag. "So, when inflation pressure is expected to fade - as is the case today - it does not make sense to react by tightening policy," said Lagarde.
Monetary policy today must remain patient and persistent, while being alert to any possible destabilizing dynamics emerging, she added.
