ECB Admits Challenges in Managing Inflation Amid Uncertainty – Lagarde

The President of the European Central Bank (ECB), Christine Lagarde, acknowledged on March 12, 2025, in Frankfurt, the difficulty in predicting the consequences of ‘shocks’ from tariffs and increased defense spending. The ECB may miss its 2% inflation target more frequently due to ‘exceptionally high uncertainty,’ Lagarde stated. A week after signaling a potential slowdown in interest rate cuts following the sixth consecutive reduction to 2.5%, Lagarde warned that maintaining inflation at exactly 2% would be ‘impossible.’ Instead, the ECB aims for inflation to converge toward 2% over the medium term. Lagarde emphasized that higher public debt for defense and infrastructure funding, along with possible trade wars involving the U.S., could directly fuel inflation and increase volatility. The eurozone’s vulnerability was highlighted due to its heavy reliance on global trade and energy imports. Larger shocks might result in more persistent inflation risks, she added. Rising tariffs and significant debt-financed increases in defense and infrastructure spending by Germany and other eurozone countries could create ‘new, two-sided shocks,’ potentially slowing or accelerating inflation. ‘The direction of these shocks is much harder to predict,’ Lagarde said, according to Financial Times. Acknowledging the challenges ahead, Lagarde reiterated the need for flexibility in monetary policy responses and clear frameworks to avoid short-sighted reactions. The ECB last reviewed its monetary strategy in 2021, shifting its inflation target from ‘below but close to 2%’ to exactly 2% over the medium term. A new strategic review is currently underway, with details yet to emerge.