Christine Lagarde: The path ahead
The euro area has been hit by an inflation shock, which is now working its way through the economy. While headline inflation is likely to decline steeply this year, driven by falling energy prices and easing supply bottlenecks, underlying inflation dynamics remain strong.
In such an environment, our ultimate goal is clear: we must – and we will – bring down inflation to our medium-term target in a timely manner.
But to achieve this goal we need a robust strategy, which takes into account the high levels of uncertainty we are facing today. As John Maynard Keynes once observed, "it would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain".
In current conditions, a robust strategy calls for a data-dependent approach to making policy and a clear reaction function so that the public understands the sources of information that will be important to us.
To that end, our future policy path will be determined by three factors: our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.
At the same time, I have made clear that there is no trade-off between price stability and financial stability. We have plenty of tools to provide liquidity support to the financial system if needed and to preserve the smooth transmission of monetary policy.
In my remarks today, I will discuss our policy path so far and what lies ahead. And I will explain the reaction function that will govern our future rate decisions.
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