Eurozone inflation will stay elevated for longer than previously expected, European Central Bank President Christine Lagardeunveiled on Monday, but she stuck to her call that it will drop below the central bank's 2% target over the medium term.
“We still see inflation moderating in the next year, but it will take longer to decline than originally expected,” Lagarde told MEPs on the Parliament's economics committee.
"The challenge is not over yet. Not only the course of the pandemic, but also the decisions taken by policymakers will continue to determine the strength of the recovery. And that is why our regular hearings are so important", the ECB's President said.
Economic activity continued to recover strongly in the third quarter: quarterly gross domestic product (GDP) growth stood at 2.2% and GDP is still expected to exceed its pre-pandemic level around the end of the year. After the great financial crisis, euro area GDP took seven years to return to its pre-crisis level.
Turning to inflation, the ECB's President said in her speech, the rate increased by more than we had anticipated in September, standing at 4.1% in October. The upswing in inflation is being driven by three primary forces.
The first of these is energy prices, the second is that the recovery in demand related to the reopening of the economy is outpacing constrained supply and this is pushing up prices. And the third is that the reversal of the temporary cut in German VAT last year is mechanically driving up current headline inflation figures.
Overall, the ECB board continues to foresee inflation in the medium term remaining below the new symmetric two per cent target.
