Inflation fears have surpassed US borders. Christine Lagarde, president of the European Central Bank (ECB), warned that abrupt changes in global trade and the defense system of the region will make it more difficult to maintain inflation stability.
Christine Lagardehas said that the changes are causing big shocks to the eurozone economy. These shocks could make inflation more volatile and increase the risk that price growth will become more persistent.
She said that these shocks make it impossible for the ECB to send policy signals. Instead, the bank must double down on its 2% inflation goal and spell out how it will respond to different shocks.
She said, “Our expectations have indeed been swept aside in the last few years, and in the last few weeks in particular […] We have seen political decisions that would have been unthinkable only a few months ago.”
The ECB is most worried about big shocks to inflation, which have a bigger effect than small ones and could make inflation last longer. However, she said that there was a chance that these shocks would cancel each other out and stop price increases.
Not to forget that the markets have been left guessing during a time of high instability caused by the Trump administration’s opposition to long-standing international cooperation.
How the ECB plans to cope
The ECB has lowered interest rates six times since June. Officials are now banking on the inflation returning to their goal of 2% at the beginning of next year. To help the euro zone’s failing economy, interest rates will continue to be lowered.
However, they are still figuring out what effect the constant stream of tariffs from US President Donald Trump’s government and Europe’s increased defense spending will have. Unlike the ECB, the US Fed has put on hold lowering the interest rate until it is sure of what Trump is really doing.
Largade thinks that Trump tariffs will do more good than harm. She said, “Trade fragmentation and higher defense spending in a capacity-constrained sector could in principle push up inflation […] Yet US tariffs could also lower demand for EU exports and redirect excess capacity from China into Europe, which could push inflation down.”
Meanwhile, Lagarde said that the ECB is looking at different possible outcomes for how trade taxes and plans for government spending will impact inflation and growth.
The government is also investigating what to do if supply shocks happen more often. Previously, they were mostly ignored because they were thought to only slightly boost price growth.
But the past few years have shown that price predictions can be off target if there is a chance that these kinds of events will get bigger and last longer, no matter whether the shocks are caused by supply or demand.
One person said that there needs to be clarity about how the central bank will respond appropriately in the event of large market disruptions. The person expressed confidence, saying that the ECB has a strong track record of adding liquidity to financial markets during times of stress and also has two backup programs.
In the second half of 2025, the ECB will talk about the results of a review of its monetary policy plan. Even though it’s not as broad as an earlier exercise that finished in 2021, it could still have big effects on how rates are set and how crises are handled in the future.
European markets rally
Today has been a good day for European markets because the European Union put tariffs on U.S. imports of steel and aluminum in response.
During afternoon trade, the regional Stoxx 600 was up 1%, but it was down from earlier gains. All big stock markets were in the green. German stocks were the first to go up. In London, the DAX average was up 1.6%.
The Stoxx Europe Retail Index fell 2.7% this morning, a big drop for retail stocks. The Spanish fashion giant Intidex dragged it down. Later in London, its shares were down 7.4% after its fourth-quarter results showed that sales had recently slowed.
Elsewhere, Zealand Pharma’s stock rose to the top of the Stoxx 600, rising 35.5%. This was after the company revealed a deal with a Swiss competitor, Roche, to develop and sell an obesity drug together.
Tuesday’s talks between U.S. and Ukrainian officials in Saudi Arabia finished with Ukraine agreeing to a 30-day ceasefire negotiated by the U.S. as soon as Russia agreed to the plan. This boosted the market in the region.
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This articles is written by : Nermeen Nabil Khear Abdelmalak
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