MNI BRIEF: Uncertainty Clouds Improving Outlook - Lagarde

The European Central Bank will decide its interest rate path on the basis of incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission, president Christine Lagarde told the International Monetary and Financial Committee in Washington on Friday, with historically high wage growth expected to support core inflation as it returns to target over the projection horizon.

However. she said the outlook remains surrounded by considerable uncertainty, with both upside and downside risks”. “Stronger than expected pipeline pressures or higher than anticipated increases in wages or profits could drive up inflation, while financial market tensions and falling energy prices could lead to faster disinflation," she added.

Lagarde reiterated the Governing Council’s commitment to maintaining reinvestments from the pandemic emergency purchase programme until at least the end of 2024, and said markets appear able to absorb “part” of the gradual increase in debt issuance to be absorbed by investors as the ECB shrinks its balance sheet, Lagarde said.

The global economic outlook has improved since October, she said, but the recovery remains fragile, amid continued uncertainty stemming in particular from the war in Ukraine.