European Central Bank President Christine Lagarde acknowledged on Thursday that euro-zone inflation was running hotter than expected and with risks tilted to the upside, but continued to forecast it would ease through this year.
Speaking after the ECB kept its policy unchanged as expected, Lagarde told a news conference that policymakers would not rush into new moves, but also chose not to repeat her past comment that a rate hike this year was very unlikely.
"Inflation is likely to remain elevated for longer than previously expected but to decline in the course of this year ... Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term," she said.
"The situation has indeed changed."
Lagarde told reporters that while there was "unanimous concern" among ECB Governing Council members about inflation, they were also determined not to rush to any conclusions until more information was available.
"We will continue to observe the sequence we have agreed and we will be gradual in any determination we make," she said.
While global peers such as the US Federal Reserve and the Bank of England tighten policy, the ECB earlier kept policy unchanged, staying on track to provide copious stimulus.
Lagarde said January's higher-than-expected inflation rate of 5.1 per cent was predominantly down to the direct and indirect impact of a surge in energy costs, with higher food prices also weighing due to higher transport and fertiliser costs.
While she said the impact of the Covid-19 pandemic was becoming less severe with each wave, she stressed that national virus containment measures could still dampen activity.
Without referring explicitly to tensions between Russia and the West over Ukraine, she said that "geopolitical clouds were hanging over Europe" which could also hit growth prospects.
The central bank for the 19 countries that use the euro has long argued that inflation will soon abate without its intervention and actually fall below its 2 per cent target by year-end, so withdrawing support now would be counterproductive.
But financial investors and a number of policymakers have started to question this narrative, especially since the ECB has persistently underestimated the current spike, forcing it to repeatedly revise its forecasts.
Markets already doubt the ECB projections and are pricing in 28 basis points of rate hikes this year, with the first move seen in July, despite the bank's insistence that any move in 2022 is very unlikely.
The issue is that inflation is forecast to hold just below its 2 per cent objective in 2023 and 2024, so even a small increase in the inflation path could put price growth right on target, reducing the need for stimulus.
