Frankfurt: European Central Bank (ECB) President Christine Lagarde stated that the bank remains unconditionally committed to its 2% medium-term inflation target as it evaluates the impact of the energy shock resulting from the Middle East conflict.

According to Anadolu Agency, Lagarde, speaking at a conference titled "The ECB and Its Watchers" in Frankfurt, emphasized that policymakers would not hastily act without determining the scale, duration, and persistence of the shock. She clarified that the ECB is prepared to respond if inflation risks increase. Lagarde noted that monetary policy cannot directly reduce energy prices, but the bank must recognize when rising energy costs could lead to widespread inflation through indirect effects or wage and inflation expectation changes.

Lagarde outlined the ECB's approach, which is based on three principles: assessing the shock's nature before acting, focusing on risks and alternative scenarios rather than just the baseline outlook, and maintaining a range of policy options depending on the shock's intensity and duration and its impact on the economy. She stated that while small, short-lived supply shocks can be overlooked, more significant and persistent deviations from the inflation target strengthen the case for action.

Lagarde compared the current situation to the 2021-2022 energy crisis, suggesting it is more manageable. She highlighted that gas prices had previously surged to approximately £340 ($394.3) per megawatt hour in August 2022, compared to around £60 now, and noted a more favorable macroeconomic environment. However, she cautioned that vigilance is necessary due to attacks on energy infrastructure, such as the Ras Laffan facility in Qatar, which have reduced the likelihood of a swift normalization. Additionally, lower oil reserves and tightening LNG supply indicate the full impact of lost supply may not yet be realized.

Lagarde also warned that firms and workers might respond more quickly than during the last inflation surge, as a generation has experienced high inflation for the first time and may react differently in the future. She concluded by stating that the ECB would continue a meeting-by-meeting, data-dependent approach and could modify policy as needed.