European Central Bank won't overreact to fleeting inflation

European Central Bank head Christine Lagarde says Europe's monetary authority isn't about to “overreact” to temporary inflation by tightening policy

FRANKFURT, Germany -- Europe's current burst of inflation is temporary and won't lead the European Central Bank to “overreact” by withdrawing stimulus or raising interest rates, ECB President Christine Lagarde said Tuesday.

“What we are seeing now is mostly a phase of temporary inflation linked to reopening,” Lagarde said in a speech Tuesday in Frankfurt, Germany opening the ECB's annual forum on central banking.

Lagarde reviewed reasons such as supply bottlenecks that have temporarily pushed up prices, and so-called base effects, the result of unusually low inflation in the year-earlier period due to very low oil prices and tax breaks during the depths of the pandemic. While longer-term forces could push inflation higher or lower, Lagarde was clear that the current round of higher readings would not budge the bank off its stimulus posture.

“The key challenge is to ensure that we do not overreact to transitory supply shocks that have no bearing on the medium term,” she said. She said monetary policy also need to keep “nurturing the positive demand forces that could durably lift inflation” toward the bank's goal of a sustainable 2%.