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The ECB's Savvy Gradualism

Unlike the US Federal Reserve, the European Central Bank has no fiscal backstop and must worry about the cohesion of the eurozone, in addition to the risk of inflation. Given these complex policy conditions, ECB President Christine Lagarde's careful approach appears to be as sound politically as it is economically.

STANFORD – This month, the world’s major central banks shifted gears and announced plans to tighten monetary policy. But there was one notable exception: the European Central Bank, which says it does not intend to raise interest rates in 2022, even though it is well aware of today’s inflation risks.

By contrast, the US Federal Reserve now expects to raise its policy rate three times in 2022, and the Bank of England has already increased its main policy rate by 15 basis points. Moreover, to keep an earlier promise that it would not raise rates until it had unwound its balance sheet, the Fed will accelerate the wind-down of its monthly asset purchases.

Does this mean that the ECB is “soft on inflation,” occupying a dovish outlier position among the world’s major central banks? Is Germany’s bestselling tabloid, Bild, justified in bestowing on ECB President Christine Lagarde the mocking sobriquet “Madame Inflation”?

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