ECB warns inflation set to become more volatile

ECB warns inflation set to become more volatile

FRANKFURT
ECB warns inflation set to become more volatile

The European Central Bank has warned of "new challenges" from trade tensions to AI that could make inflation more volatile, and pledged flexibility in its monetary policy.

The warning came in the first major review of the ECB's strategy since 2021, and follows several tumultuous years in which the central bank has had to battle a historic surge in consumer prices.

The Frankfurt-based institution, which sets interest rates for the 20 countries that use the euro, maintained its inflation target at 2 percent.

But it said that "the world has seen major changes that present central banks, including the ECB, with numerous new challenges."

"The inflation environment will remain uncertain and potentially more volatile... posing challenges for the conduct of monetary policy."

It pledged to use all its available tools in a "sufficiently flexible" manner "to enable an agile response to changes in the inflation environment."

Speaking at an ECB forum in Portugal, the central bank's president, Christine Lagarde, said the institution's strategy had "proven effective."

The focus on returning inflation to the bank's target in the medium term gave it "essential flexibility to absorb an extremely large shock" in the form of surging prices in the wake of the coronavirus pandemic and Russia's full-scale invasion of Ukraine, she said.

Policymakers were now also using different possible scenarios to better understand risks, such as global trade uncertainty caused by potential U.S. tariffs, Lagarde said.

Another challenge singled out by the ECB was the rapid digitalization of the economy, highlighted by the emergence of artificial intelligence.

Still, it noted that the "potential longer-term effects" of AI "remain highly uncertain."

New threats to Europe's security had emerged that could affect price stability, the central bank said, with Russia still waging war on Ukraine.

While the ECB did not unveil any major changes to its strategy, it repeatedly stressed that it was ready to take a flexible approach.

It said it stood ready to take "appropriately forceful" actions if inflation deviated too much from its target.

The ECB's 26-member governing council would take into account all potential "risks and uncertainty" that could affect inflation, it said.

The pledge to show flexibility comes after the ECB faced criticism for moving too slowly to tackle surging energy and food costs triggered by Russia's 2022 full-scale invasion of Ukraine and post-pandemic supply chain woes.

Policymakers were eventually forced to hike rates at a record pace to bring eurozone inflation back under control.

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