ECB’s Lagarde: Council Unanimous on Need to Act, Given HICP Outlook

4 June, 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank’s Governing Council felt unanimously at its latest meeting that the situation called for renewed policy action, with the key outcome of its deliberations backed by broad consensus, ECB President Christine Lagarde said Thursday.

Speaking at the press conference following the ECB’s monetary policy decisions, Lagarde, according to a transcript provided by the ECB, confirmed that the risk of disinflationary tendencies was on monetary authorities’ minds.

In explaining why the ECB’s policy decisions centred on its Pandemic Emergency Purchase Programme (PEPP), whose original €750bn volume the ECB stocked up by €600bn, Lagarde invoked the deterioration in the inflation outlook, citing in particular the 0.8-point cut to 1.6% in the staff projection of 2022 Eurozone HICP. As a second factor behind the increase, she added, euro area financial conditions are ‘significantly tighter today’.

‘I can assure you that there was a unanimous view in the Governing Council that action had to be taken’, she said. ‘In the face of that inflation outlook, and given our mandate of price stability, action had to be taken.’

The three aims of easing financial conditions, ensuring policy transmission and returning inflation developments to their pre-pandemic path ‘justified fully the expansion of PEPP’ by €600bn, she asserted.

Nonetheless, she conceded, ‘obviously there was a debate’, in the course of which Council members ‘collectively determined, and there was broad consensus around that proposal’, that a €600bn stock-up would be effective, ‘while allowing us to monitor how some key developments unfold in the coming months’.

Lagarde noted that the Council had simultaneously decided to extend the minimum horizon for net purchases under the PEPP by six months to the end of June 2021. This, she explained, reflected the ‘sense that by then, inflation hopefully will start kicking in again and we will have a better visibility of the situation at that point in time.’

Governing Council member had ‘clearly’ discussed the risk of disinflation, she said, calling this ‘an issue that is very central to our macroeconomic radar screen’. The 2022 euro area HICP projection of 1.3% is ‘certainly not close to the 2% and below 2% objective that has been set’, she added.

The Council had not discussed including so-called junk bonds in its asset purchases, she said, though she left the door open to such a discussion.

Lagarde sidestepped the question of what it would take for the ECB to cut interest rates yet further, affirming simply that ‘clearly the PEPP was the best instrument to use both in terms of monetary stance but also in terms of monetary policy transmission.’

The ECB would continue to rely on the PEPP to ward of risks of fragmentation, she said. The ‘guiding principle’ of flexibility inherent to the PEPP would remain an enduring feature throughout the programme’s existence, she said.

Lagarde declined to be drawn into a discussion about Greek debt sustainability, observing instead that countries around the world were deploying fiscal tools to counter the fallout from the pandemic. There was thus ‘no alternative than to actually issue debt’, she said.