ECB chief Christine Lagarde: ‘Our primary objective is price stability’

Faced with a crisis that’s sending eurozone inflation to record highs, European Central Bank (ECB) President Christine Lagarde struck a decisive tone Wednesday during the Atlantic Council and Atlantik-Brücke’s Frankfurt Forum on US-European GeoEconomics—pledging to bring prices under control through consistent and deliberate policy.

“We will do what we have to do, which is to continue hiking interest rates in the next several meetings,” she told moderator Maria Demertzis, deputy director of Belgian think tank Bruegel.

While acknowledging such moves could slow economic growth, Lagarde said failing to act would “hurt the economy far more.” 

Here are the key takeaways from the Frankfurt Forum’s fireside chat with Europe’s top banker, which kicked off the day-long event:

Two faces of inflation

  • Lagarde said the persistent price hikes have taken many economic officials by surprise, as they assumed the inflation during the post-pandemic economic recovery was only “transitory.” She added: “In the textbook, supply bottlenecks eventually fade out; energy prices eventually return. Well, this didn’t happen.”
  • Accelerated by Russia’s invasion of Ukraine, today’s crisis, Lagarde said, has been “more persistent and of a magnitude that nobody had expected.”
  • She also distinguished between the causes of inflation in the United States, where it is demand-driven, and in Europe, where it is supply-driven (and caused more by energy). The latter, Lagarde added, is “far more complicated because monetary policy cannot, in and of itself, reduce the price of gas [and] cannot stop the war.”

Meeting the moment

  • By steadily hiking interest rates over the course of regular meetings, Lagarde said the goal would be to return inflation, which hit a record 9.1 percent in August, to 2 percent in the medium term.
  • But she added that overreliance on such targets during these uncertain times “would be a constraint and would not be good communication.” Therefore, Lagarde said, any decisions will ultimately be made based on what’s known at the moment. “It’s probably much safer, and much more accountable to our mission, to be data-dependent and to decide meeting by meeting.”
  • The ECB chief also touted the new transmission protection instrument (TPI), unveiled this summer, as a tool with which to streamline bank policy across the eurozone to prevent financial fragmentation. “We believe that not only should we deliver on monetary policy, but we must ensure monetary policy is delivered across all member states.”

Can the euro become king?

  • Asked whether the euro can play a larger global role as a reserve currency, Lagarde said that while the size of the eurozone economy and the stability of its institutions are major advantages, it still falls short when it comes to “depth of its capital market.” 
  • Continental leaders have advocated for the idea, she said, but few are “actually moving forward with the project of really delivering on a European capital market that would be a union capital market.” 
  • So far, Lagarde said, rivalries between authorities that supervise those markets are getting in the way of achieving that goal. “We are not helping our cause of being stronger and more powerful as a currency if we keep on dealing with a fragmented market.”

The future is digital

  • As the ECB continues its move toward a digital euro—you can follow its development along with all central bank digital currencies (CBDC) around the world with the Council’s CBDC tracker—Lagarde (who praised the Council’s tracker) said privacy remains a top concern. Consumers are worried about scandals involving companies that collected payments data and then ”monetized those data by selling databases.”
  • Lagarde said this kind of data “is none of our business as central banks” and maintained that the ECB will not get ahead of public desire for a CBDC. “If Europeans don’t want it, then we shouldn’t go there,” she said. “But we should be ready if they want it, because we provide the guarantee that those data will never be exploited for commercial purposes.” 
  • Any progress toward a digital euro, Lagarde added, will need to come in close coordination with the US Federal Reserve and others. “We need to compare notes,” she said. “We need to check what the imperatives are. We need to understand what is the ideal supervision and regulatory mechanisms so that we have… systems and currencies in digital form that can talk to each other.”

Dan Peleschuk is the New Atlanticist editor at the Atlantic Council.

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Image: European Central Bank President Christine Lagarde speaks at the Atlantic Council's Frankfurt Forum on September 28, 2022. Photo by Stefan Krutsch