What level is inflation expected to remain at in the long term? What does this mean for the markets?

Comments from the ECB policymaker

Inflation is expected to remain at 2% over the medium term.
In the days following ECB decisions, we usually get a lot of comments from ECB members as they emerge from their lockdown. Generally, there is nothing new in their comments, and this time is no different.

Simkus here only confirms that the central bank is already comfortable in its current position and will need serious reasons to implement another rate cut. The market puts another rate cut at a 50% probability.

This month, Donald Trump threatened a 30% tariff on goods imported from the EU as part of his contentious global trade war. Financial markets are hopeful of a deal before an Aug. 1 deadline after the U.S. reached a deal to limit tariff increases with Japan on Tuesday.

Central bank officials are also concerned that an economic slowdown could be accompanied by a drop in prices if China and other East and Southeast Asian countries, also hit by US tariffs, dump cheap goods on European markets.

The rise in the value of the euro against a basket of other currencies is likely to make imports into the eurozone cheaper, which could also reduce inflationary pressures.

However, she said the ECB was “in a good position to wait and see” as inflation was at 2% and the central bank’s forecasts pointed to a stabilisation of the interest rate at that level in the medium term.

Lagarde added: “Wage growth is slowing and growth is developing in a relatively favorable way. This means that we are now confident that the inflation shock of the last few years is behind us and our job is to look at what lies ahead.”