- If this event had been held a few weeks ago, my speech would have been very different
- But we find ourselves yet again in a different world
- We are facing profound uncertainty about the path of the economy
- None of us can resolve the uncertainty about how the war in Iran will play out
- Our response will be rooted in our monetary policy strategy, which is well equipped to help us navigate it
- Two factors to focus on in dealing with inflationary energy shocks
- The first is the intensity and duration of the shock
- The second is the propagation of the shock, which depends on the macroeconomic environment in which it lands
- Initial shock has so far still been smaller than in 2021-22
- Two key elements on how we can calibrate policy under this uncertainty
- The first is agility, taking a meeting-by-meeting, data-dependent approach
- The second element is a focus on risks
- We needed to take into account not only the most likely path for inflation, but also the risks and uncertainty surrounding the baseline
- Supply shocks are often presented as offering central banks a binary choice
- That is to either look through, or react when inflation expectations are at risk of being de-anchored
- We will not act before we have sufficient information on the size and persistence of the shock and its propagation
- However, we will also not be paralysed by hesitation
- Full remarks
Despite market expectations, the tone in her speech here doesn't sound like she is feeling too hurried to raise interest rates in April next month. That especially since she outlines the fact that there is value in waiting to assess the overall situation. And also adding that the scale of the initial energy price shock is less profound than what they saw it to be back in 2021-22 during the Russia-Ukraine conflict.
This definitely keeps things interesting as we look to their policy decision next month.
Traders are now pricing in ~59% odds of a rate hike with 63 bps of rate hikes priced for year-end after Lagarde's comments.
