ECB’s Lagarde: Now Focussed on Returning to Pre-Covid Inflation Path

13 September 2020

By David Barwick – FRANKFURT (EconoStream) – European Central Bank monetary policy is entering the phase in which its chief aim is getting inflation back to the path followed prior to the pandemic, an objective asset purchases will be key to achieving, ECB President Christine Lagarde said Sunday.

Speaking at the Annual Meeting of the Council of Governors of the Arab Central Banks and Monetary Authorities, Lagarde, according to a text of her remarks provided by the ECB, attributed a weak near-term outlook for inflation to exchange rate effects.

Monetary policy is ‘now moving more into the second step, which is about returning the inflation path to its pre-pandemic trajectory and ensuring that it continues to re-converge with our aim in a sustained manner’, she said. ‘To achieve this, the PEPP [pandemic emergency purchase programme] is fundamental, since – alongside its market stabilisation function – it is also a powerful tool for easing the overall monetary policy stance in the euro area.’

The PEPP’s usefulness in reinforcing monetary accommodation, she said, was the motivation behind the programme’s €600 billion expansion in June to a total volume of €1.35 trillion.

With downside risks dominating and uncertainty high, public policies must complement each other, she said. As for the ECB, it stands ready to act as needed based on incoming information, she said, mentioning again in this context the exchange rate.

‘When it comes to meeting our price stability goal, there is and there will be no complacency’, she said.

The -0.2% Eurozone HICP recorded for August reflected temporary distortions, but also weaker underlying pressures, she said. ‘Near-term price pressures will also remain subdued due to the recent appreciation of the euro exchange rate.’

Turning to the economic recovery, Lagarde called it ‘clear that a full recovery requires a more significant rebound’ in consumer and business services.

With five million fewer people employed at the end of 1H than at end-2019, ‘if the current strength of the rebound does not continue – or fails to spread across all sectors – it is unlikely that they will all be re-employed in the near term’, she said. She urged that job support schemes remain deployed ‘to avoid a sharp increase in unemployment later in the year.’

Consumption and investment are subdued in the face of high uncertainty, she observed.