Trade wars, political shocks a risk to eurozone inflation - Lagarde
By Frank Prenesti
Date: Wednesday 12 Mar 2025
(Sharecast News) - Hitting the eurozone's inflation target would become more difficult due to shocks such as trade tariffs and climate change European Central Bank president Christine Lagarde said on Monday.
The ECB last week signalled a possibly slower pace in rate cuts after cutting its benchmark interest rate by 25 basis points to 2.5%. Lagarde also warned that global volatility meant it would be "impossible" to guarantee that the target rate of 2% would always be met.
"The level of uncertainty we are facing is exceptionally high," she said in a speech in Frankfurt, adding that trade fragmentation was "likely to lead to larger, more disruptive price changes" and could lead to higher inflation.
"But we are also now facing new, two-sided shocks - mainly linked to trade and defence, as well as climate change - which can amplify or counteract the existing forces," Lagarde added.
There was also an acknowledgement that higher defence spending to counter the growing threat from Russia and a retreat by the US on military assistance in European affairs combined with a potential trade war against Washington "might feed into inflation more directly and increase volatility".
"Our expectations have indeed been swept aside in the last few years, and in the last few weeks in particular. We have seen political decisions that would have been unthinkable only a few months ago," she said.
In an environment of more uncertain, larger and possibly more persistent shocks, aiming to keep inflation always at 2% was "impossible", Lagarde said.
However, bank policy must be calibrated so inflation is always converging towards 2% over the medium term and it must outline its "reaction function," so firms, households and markets will always know how a particular shock will impact policy.
Reporting by Frank Prenesti for Sharecast.com
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