European Central Bank (ECB) President Christine Lagarde praised the "remarkable" contraction in inflation with minimal job losses. She predicted that inflation would reach the 2% target by 2025. However, Lagarde warned that significant uncertainties still existed, Euronews reported.
"It is rare to avoid a significant worsening of unemployment when central banks raise interest rates in response to high energy prices," Lagarde said.
However, the ECB president warned that "uncertainty ahead is still deep" as the global economy is currently facing "transformational changes".
Lagarde made the comments during her keynote address at the International Monetary Fund (IMF)-hosted Michel Camdessue Lecture "Central Banking 2024" in Washington. In her speech, Lagarde emphasized the need for an adaptive monetary policy in an era of structural change.
Effectiveness of monetary policy depending on the development of the economy
In his speech, the head of the ECB outlined the enormous challenges facing the world economy in recent years.
"Four years ago we faced the worst pandemic since the 1920s, the worst conflict in Europe since the 1940s and the worst energy shock since the 1970s. since the last century,” she said.
Lagarde explained that the shocks fundamentally changed the economic landscape and complicated the transmission of monetary policy.
She acknowledged that clearly defined inflation targets, flexible policy instruments and analytical frameworks capable of assessing and responding to economic changes have enabled monetary policy to restore price stability without imposing excessive costs on the economy.
"Our monetary policy strategies have been effective in softening the trade-offs between inflation and employment," Lagarde said.
Structural Economic Change: Parallels Between the 1920s and the 2020s
Drawing historical parallels, Lagarde pointed to striking similarities between the post-World War I economy of the 1920s and the current decade.
Both periods saw setbacks in the integration of world trade combined with advances in technological progress. However, Lagarde acknowledged that today's challenges - such as climate change and an aging population - are unique to our time.
In the 1920s, the collapse of the Pax Britannica and the rise of economic nationalism led to a sharp fragmentation of the world economy.
Trade as a share of GDP fell sharply, contributing to deflation and economic instability. At the same time, rapid technological advances, such as the advent of the conveyor belt and the internal combustion engine, increased productivity but also fueled the speculative bubbles that culminated in the stock market crash of 1929.
Lagarde sees similar fragmentation today as global value chains restructure.
Both Europe and the US are diversifying their sources of supply, with many firms adopting proximity strategies to reduce the vulnerability of global supply chains.
In parallel, technological advances in artificial intelligence (AI) and fintech are reshaping industries, offering faster and cheaper access to credit while posing new challenges to the transmission of monetary policy.
In perspective: Need for flexibility and adaptation
In conclusion, the ECB President emphasized the importance of adaptability in monetary policy as the global economy continues to develop. The forthcoming review of the ECB's 2025 strategy will focus on understanding long-term structural changes in the post-market world with a particular focus on how these changes affect the transmission of monetary policy.
Artificial intelligence (AI) and machine learning will play a crucial role in improving forecasting models, especially inflation forecasting.
Lagarde stressed that monetary policy must remain dynamic to keep pace with a changing world.
While the main objectives of monetary policy - especially price stability - remain unchanged, central banks must remain flexible, adapting to the realities of a rapidly transforming global economy. | BGNES
