ECB’s Lagarde: Agreed It Was Necessary to Recalibrate at Next Meeting

29 October 2020

By David Barwick – FRANKFURT (EconoStream) – The Governing Council of the European Central Bank decided at its latest monetary policy meeting that a thorough recalibration of its monetary policy stance would have to wait until December, but vowed that it would not remain passive between now and then, ECB President Christine Lagarde said Thursday.

In a highly unusual move, the ECB’s press release following the decision to leave its policy measures unchanged for the moment opened with an acknowledgment of the downside risks, in particular with respect to the pandemic, and made clear that these would be addressed six weeks hence.

‘The full Governing Council was in total agreement to analyse the current economic situation and to recognize and acknowledge the fact that risks are clearly, clearly tilted to the downside’, Lagarde said at the subsequent press conference.

Having ‘agreed it was necessary to recalibrate at our next Governing Council meeting’ on December 10, she said, ECB staff is ‘already at work in order to do this recalibration exercise’. The exercise, she stressed, would not be about ‘one or the other’ of the ECB’s tools, but rather ‘will be looking at all our instruments … we will be looking at everything’ and observers shouldn’t ‘assume that it will be one instrument’ relied on for the recalibration.

However, she said, ‘In the meantime, we’re not going to just stand still.’ Noting the built-in flexibility of the ECB’s pandemic emergency purchase programme (PEPP), Lagarde said monetary authorities would use this ‘to address the situation and to address any development of the situation.’

‘If we have to frontload again, we will do so’, she said of asset purchases made under the PEPP.

Asked under what circumstances the ECB would not make a move in December, Lagarde emphasised that the Council was ‘in complete agreement that action will be needed and that recalibration is the right approach.’

Covid-19 case numbers, the measures to contain the pandemic and the fiscal policy reaction will all ‘lead to staff readjusting their projection’, she said. The ECB’s staff macroeconomic forecasts are to be updated in conjunction with the December monetary policy meeting.

‘We have little doubt, given what is expected as a result of the risks that we are seeing, that circumstances will warrant’ the promised recalibration, she added.

The GDP numbers for the third quarter, due out tomorrow, ‘might surprise on the upside’, she said. ‘On the other hand, we are pretty condiment that our number for the fourth quarter will be on the downside.’

In particular, the month of November would be ‘very negative’, she said, pointing to ‘the slowdown and the sort of reduced momentum has been apparent since September.’

Still, Lagarde dismissed concerns about deflation. Although headline HICP would be in negative territory until early next year, ‘we call it negative inflation precisely because we don’t think it is deflation’, she said. ‘While we believe those numbers will be low, those numbers will move back.’