Since the launch of the monetary union, Europe has not witnessed such a rapid shift in the inflation environment; headline inflation in the euro area, negative as recently as December 2020, has risen by 11 percentage points from its trough during the COVID-19 pandemic to last month's levels, and surged as high as 25 percent in Estonia, Lagarde said in her lecture, titled "Monetary policy in a high inflation environment: Commitment and clarity," according to the ECB.

"Three interlocking factors have led to this turnaround: the fact that we are facing repeated shocks; that those shocks are passing through more strongly into inflation; and that they are proving more persistent than in the past due to structural changes in the economy," she highlighted, warning that the combination of these shocks mean that inflation is likely to remain above target for some time yet.

The ECB president noted that in such challenging times, central banks have to rely on their loyalty to their mandate to ensure price stability and be prepared to make the necessary decisions, however difficult, to bring inflation back down — as the consequences of letting too-high inflation become entrenched would be much worse for everyone involved.

Asking what this implies, she said that the answer can be found in the writings of Estonian economist and professor Ragnar Nurkse, noting that while Nurkse was well known for his work on international financial architecture, he also made an important contribution to the understanding of inflation based on the experiences of the interwar years.

"In particular, he showed that fighting inflation is both complex and simple," Lagarde said.

Click here to read Friday's lecture* in full.

Lagarde also met with Prime Minister Kaja Kallas (Reform) at Stenbock House on Friday.

"Russia's war in Ukraine has raised energy and food prices worldwide," Kallas said according to a press release. "In the current environment of high price increases, it is necessary to ensure a sense of security for our people and at the same time keep the economy on the most stable course possible in order to move forward stronger together."

She pointed out that she considers both central banks' interest policy as well as states' efforts toward budget balance to be important in curbing inflation. "At the same time, it must be kept in mind that after the COVID and energy crises, people must not be burdened with too high interest rates, so that they can continue paying their loans," she added.

Kallas: Use frozen Russian assets to rebuild Ukraine

During her meeting with Lagarde, the Estonian prime minister also raised the issue of using frozen Russian assets for the reconstruction of Ukraine.

"We have discussed with European state leaders how Russian destruction in Ukraine could be compensated for with funds of the aggressor, and we hope to find a concrete solution soon," Kallas said. "We also need to further enhance and expand sanctions imposed on Russia to raise the price of aggression and force Russia to end the war."

*Christine Lagarde's Friday lecture in the Independence Hall of the Bank of Estonia was organized by the central bank as part of a series dedicated to Estonian economist and professor Ragnar Nurkse.

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