European Central Bank (ECB) President Christine Lagarde on Friday warned that the ongoing escalation in global trade tensions complicates the inflation outlook.
“While the international community has benefited from an increase in trade and a reduction in barriers over many decades, the escalation of trade tensions and the imposition of tariffs have created strong headwinds for the global economy,” she said during her speech at the International Monetary and Financial Committee meeting in Washington, DC.
Stating that global inflation is expected to decline gradually due to the easing of labor markets in advanced economies and the impact of monetary policy tightening in recent years, Lagarde warned: “However, the ongoing escalation of trade tensions complicates the inflation outlook.”
She pointed out that tariffs could trigger fluctuations in exchange rates, affect import prices and disrupt supply chains, and noted that their impact on inflation is uncertain.
“Geopolitical tensions continue to present two-sided inflation risks as regards energy markets, confidence and investment,” she noted.
Explaining that most measures of the underlying trend of inflation indicate that inflation will settle on a sustainable basis to the ECB’s medium-term target of 2%, Lagarde reiterated that they are determined to stabilize the inflation target on a sustainable basis.
“The major escalation in global trade tensions and associated uncertainties will likely lower euro area growth by dampening exports and may also drag down investment and consumption. Deteriorating financial market sentiment could lead to tighter financing conditions and increase risk aversion, making firms and households less willing to invest and consume,” she said.
On the other hand, Lagarde stated that an increase in defense and infrastructure spending will likely add to economic growth.