ECB’s Lagarde Repeats: Ready to Adjust All Instruments as Appropriate

15 October 2020

By David Barwick – FRANKFURT (EconoStream) – European Central Bank President Christine Lagarde on Thursday reiterated the ECB’s willingness to take further measures if needed.

In a virtual statement at the IMF Annual Meetings, Lagarde, according to a text provided by the ECB, relied on previous language and broke no new ground with regard to the possibility of more monetary accommodation.

However, she warned somewhat more sharply than previously about the risks to financial stability.

‘In the current environment of elevated uncertainty, the Governing Council will carefully assess all incoming information, including developments in the exchange rate, with regard to its implications for the medium-term inflation outlook’, she said. ‘We continue to stand ready to adjust all of our instruments, as appropriate, to ensure that inflation moves towards our inflation aim in a sustained manner, in line with our commitment to symmetry.’

The ECB’s measures to counter the crisis are ‘crucial’ and are helping to keep financing conditions favourable across the region, she said. Globally, it is essential that monetary and fiscal policy support not be removed too soon, she said.

A continued recovery in Europe after the ‘strong rebound’ of 3Q hinges on the pandemic’s impact on investment, spending and savings, she said. The uncertainty will limit economic strength, she said, but ‘the euro area economy will continue to be supported by very accommodative monetary and fiscal policies along with an expected gradual resumption in global activity.’

Headline inflation would remain negative over the next months and then return to positive territory early next year, she said. ‘Over the medium term, a recovery in demand, supported by accommodative monetary and fiscal policies, will put upward pressure on inflation’, she added.

Lagarde warned that risks to Eurozone financial stability are still elevated, ‘as vulnerabilities in the non-financial sector have increased owing to weak earnings and rising indebtedness.’

Bank profits would remain ‘very weak’ and credit losses are ‘set to increase’, she said, but have adequate buffers to take the losses and continue financing the real economy.

In the non-bank financial sector, regulatory reforms are needed to bolster resilience, she said. These reforms ‘should also reflect macroprudential perspectives’, she said.