© Reuters. FILE PHOTO: President of European Central Bank Christine Lagarde addresses a news conference following the meeting of the Governing Council’s monetary in Frankfurt, Germany March 10, 2022. Daniel Roland/Pool via REUTERS
PARIS (Reuters) – The world’s two top central banks will move out of sync in the foreseeable future, as the war in Ukraine has vastly different effects on their economies, European Central Bank President Christine Lagarde said on Monday.
The U.S. Federal Reserve raised interest rates last week and signalled a string of future moves, just days after the ECB said it was in no hurry to raise its record-low deposit rate, even while it continues to unwind exceptional stimulus.
“Our two economies are in a different place in the economic cycle, even before the war in Ukraine,” Lagarde told a financial conference. “For geographical reasons, Europe is way more exposed (to the war) than the U.S..”
Soaring energy costs have already pushed euro zone inflation to a record-high 5.9% last month and the rate could hit 7% in the months ahead, well above the ECB’s 2% target.
With food prices also expected to jump, the inflation surge will cut deep into households’ purchasing power and the ECB has cut its growth projections, with some policymakers arguing that an even worse outcome is already more likely.
Lagarde said the U.S. economy is less reliant than Europe’s on commodity imports and its trade will also be less affected, so that the two central banks will need to move out of sync.
“Our monetary policies won’t be running on exactly the same rhythm,” she said.
As a consequence of the war, Europe will need to speed up the greening of its economy to reduce its reliance on energy from Russia, its biggest supplier of natural gas.
This transition will be inflationary in the short- to medium-term, Lagarde warned, although the long-term impact of the transition will be to weigh on prices.
“In the short, medium term, it will be of an inflationary nature. Whereas in the long term, forces on prices will be rather deflationary, she said.