Christine Lagarde: Monetary policy in a high inflation environment - commitment and clarity

Lecture by Ms Christine Lagarde, President of the European Central Bank, organised by the Bank of Estonia (Eesti Pank) and dedicated to Professor Ragnar Nurkse, Tallinn, 4 November 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Inflation in the euro area is far too high, reaching double digits for the first time in October. Here in Estonia inflation has surged as high as 25%. The combination of shocks we are facing – war, energy, disrupted supply chains, re-allocation of demand – means that inflation is likely to stay above our target for some time.

In such challenging times, central banks have to rely on their inner compass – their loyalty to their mandate – to ensure price stability. They have to be prepared to take the necessary decisions, however difficult, to bring inflation back down – because the consequences of letting too-high inflation become entrenched would be much worse for everyone.

So what does this imply?

The answer can be found in the writing of Ragnar Nurkse, to whom this lecture series is dedicated. Though well known for his work on international financial architecture, he also made an important contribution to our understanding of inflation based on the experiences of the interwar years.

In particular, he showed that fighting inflation is both complex and simple.

Complex because, in times of great volatility, economies can face a series of shocks which produce rising and persistent inflation. Witness the 1920s when inflation was driven, in part, by tumbling exchange rates and acute supply bottlenecks, including for energy.

But simple because, in the end, there is only one way that those shocks can lead to sustained inflation – and that is if monetary policy accommodates them and allows them to feed into inflation expectations.