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ECB’s Lagarde Warns Disinflation Possible as Crisis Transforms Economic Models

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Speaking about alternative growth models at a webinar on Saturday, the European Central Bank (ECB) President Christine Lagarde said that a falling trend in price pressures will persist over the next two years due to the coronavirus pandemic-driven economic transformation.

Key quotes (via Bloomberg)

“The transition to new economic models will be disruptive — they will probably be more disruptive in the first two years, obviously hitting employment and production — and then we can hope it improves productivity.”

“So the inflation dynamic will necessarily be impacted, probably with a disinflationary, deflationary aspect at first, and then inflation dynamic.”

“The ECB estimates that supply chains will shrink by around 35% and use of robots will increase by between 70% and 75%.”

“An increase in online retail payments since the start of the year, and called on the European Union to develop a single digital market.”

“Pandemics typically increase inequality, with economic and social consequences that the central bank will have to take into account.”

FX implications

Lagarde’s comments are likely to have little to no impact on the common currency, as the broader market sentiment and US dollar dynamics remain the king amid the virus concerns.

In the week ahead, the European Union (EU) leaders’ talks on the recovery fund will take center stage, led by the European Commission President Ursula von der Leyen, on July 8.

EUR/USD settled flat on Friday at 1.1245, gaining 0.15% on the week.

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