2026-03-25 11:45, updated 2026-03-25 11:47
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2026-03-25 11:45
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2026-03-25 11:47
“Learn to live without certainty, but not to be paralyzed” – Christine Lagarde outlines a new strategy for the euro zone in times of global shocks. The ECB president does not rule out interest rate increases in April if geopolitical tensions cause another inflation shock.
Christine Lagarde's speech during the “The ECB and Its Watchers” conference in Frankfurt leaves no doubt – the era of predictability in monetary policy is a thing of the past. The President of the European Central Bank painted a picture of an economy at a turning point, where old econometric models must give way to flexible crisis management. According to Lagarde, Europe can no longer rely on passive stability, but must actively build its resilience in the face of the fracturing of the post-war world order that guaranteed cheap energy and free trade for decades.
The key challenge for the euro area remains the specific situation on the labor market, which, despite anemic GDP growth, is showing surprising strength.. Lagarde drew attention to the phenomenon of “job hoarding” by companies fearing staff shortages, which causes employment to grow almost at a rate one to one with real GDP. This situation, however, creates wage pressure which, although justified by historical price increases, may make it difficult to bring inflation to the set target, creating a risk of its persistence at a level above the permissible norm.
The ECB will be there make decisions from meeting to meeting
When it comes to interest rates, the ECB maintains a “data-dependent” stance, distancing itself from rigid deadline declarations. President Lagarde made it clear, pointing to the priority of stability:
we are determined to ensure lasting stabilization of inflation at our 2% medium-term target. Particularly in the current environment of extreme uncertainty, we will take a data-driven approach and make decisions on a meeting-by-meeting basis.
Christine Lagarde also said that The European Central Bank is ready to raise interest rates in Aprilif the inflation shock caused by the war with Iran gets out of control.
Lagarde stressed that if ECB action were necessary, policymakers could respond in a “graded way” depending on the nature of the inflation trend. Drastic action will only be necessary if inflation begins to deviate “significantly and persistently” from the target.
Core inflation under the microscope
Every move by Frankfurt is now to be the result of a precise analysis of core inflation, not previously agreed schedules. The global political arena is becoming an increasing source of risk for the ECB, especially in the context of potential trade wars and energy blackmail.
Lagarde warned that Europe must develop defense mechanisms against external shocks that could directly hit EU exports and price stability. Economic sovereignty is no longer just a political slogan, but has become a necessary condition for effective monetary policy.
An important topic of the speech was the issue of the average citizen's perception of inflation, which often differs from dry statistical data. High food and energy prices build public sentiment more strongly than the HICP index, which requires a new information strategy from the central bank. Effective communication is essential. Improving public understanding of economic concepts will not only bring perceived inflation closer to measured inflation, but will also allow citizens to make informed financial choices.
Lagarde: The initial shock has been less so far
How people have experienced inflation in the recent past also matters. Research shows that personal experiences of inflation can have a lasting impact on the way people form their expectations, with recent, significant events having a disproportionate importance.
When the 2021-2022 energy shock hit, several of these channels were operating simultaneously. However, there are currently factors that point to a smaller gear ratio.
First, the initial shock has been smaller so far. In 2022, the shock was exceptionally large and long-lasting. Even before the Russian invasion began, oil prices tripled between October 2020 and March 2022 – and natural gas prices rose even more as Russia gradually cut supplies.
As a result, Europe was effectively cut off from a supplier that supplied around 45% of its natural gas imports, and forced to find new suppliers, compete in the global LNG market and build new import infrastructure.
Oil prices peaked at around $130 per barrel in March 2022, comparable to today's levels. However, gas prices have risen to much higher levels than ever before: 340 euros per megawatt hour in August 2022 compared to around 60 euros today.
Secondly, the current macroeconomic situation is milder. In 2022, the economy was ready to take over the economy. Europe experienced strong pent-up demand as the economy reopened following the pandemic. Supply chains continued to be disrupted following the pandemic. There were significant labor shortages. Core inflation at the beginning of the shock was over 5%.
The ECB's analysis confirms that this combination of factors has exacerbated the inflationary effects. In particular, if it were not for demand pressure, the impact of supply shocks on inflation would be much smaller.
Currently, the euro area economy is in a phase of moderate recovery, without the clear imbalance between demand and supply that characterized 2022. Core inflation has remained close to our target for almost a year. The unemployment rate is low by previous standards, but we no longer face an acute labor shortage.
Despite numerous threats, the ECB president believes in the resilience of the European economy unless it succumbs to stagnation. As Lagarde said: four years ago at this conference, as the energy shock caused by Russia's invasion of Ukraine was mounting, I borrowed the words of Bertrand Russell: “the challenge we face is to learn to live without certainty, but not to be paralyzed by fluctuations“.
These words equally aptly describe our challenge today. But we are not in the same situation as four years ago. We have a strategy designed for a world of greater uncertainty, with risks and scenarios at the heart of it. We have a diverse set of response options. And we are in a better position if action is needed, Lagarde concluded.
Prepared by JM
