ECB’s Lagarde: Tail Risk of Financial Crisis Has Receded Materially

8 June 2020

By David Barwick – FRANKFURT (EconoStream) – The risk of the pandemic’s economic fallout becoming a financial crisis has diminished substantially thanks to the policy decisions of the European Central Bank in March, ECB President Christine Lagarde said Monday.

In a statement to the Economic and Monetary Affairs Committee of the European Parliament, Lagarde, according to a transcript provided by the ECB, invoked still-tighter financial conditions and the worsened outlook for inflation to justify last week’s actions by the Governing Council.

Measures taken in March ‘were critical in removing the tail risk of the Covid-19 pandemic and the ensuing drop in economic activity morphing into a financial crisis’, she said. ‘Since March, that risk has receded materially.’

With updated staff macroeconomic forecasts showing medium-term Eurozone inflation straying yet further from the ECB’s definition of price stability, and financial conditions unjustifiably tighter, the ECB saw the need for additional action last week, she said.

The ECB’s policy activism shows its ‘continued determination and readiness to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner’, she said.

‘We remain fully committed to our mandate, that is beyond question’, she added. The ECB will continue to buttress the economic recovery, she promised.

Lagarde said that the ECB’s Pandemic Emergency Purchase Programme (PEPP), whose original €750bn volume the ECB stocked up by €600bn last week, had been the proper choice for providing additional monetary accommodation by virtue of its flexibility, which helps stabilize financial markets and ensure policy transmission.

Moreover, she said, asset purchases directly impact credit availability for households as well as businesses of different sizes.