ECB’s Lagarde: Risks Still to Downside, But Less Pronounced

10 December 2020

By David Barwick – FRANKFURT (Econostream) – The risks facing the Eurozone economy are still largely on the downside, but are less threatening than they had been, European Central Bank President Christine Lagarde said Thursday.

At the press conference following the ECB’s recalibration of its policy measures, Lagarde said that the envelope of the pandemic emergency purchase programme (PEPP) could be further boosted if need be, but that there was no commitment to deploy the latest increase in its entirety.

‘Overall, the risks surrounding the euro area growth outlook remain tilted to the downside, but have become less pronounced’, she said in her introductory statement. ‘While the news about the prospects for vaccine roll-outs in the near future is encouraging, downside risks remain related to the implications of the pandemic for economic and financial conditions.’

Asked why the ECB had extended the PEPP by nine months, Lagarde said that expectations regarding immunity to and vaccinations against Covid-19 had played a role. ‘We have good reasons to believe that by the end of 2021 ... we will have reached sufficient herd immunity to hope that … the economy will be going to function under more normal circumstances and in particular the service sector will not be impaired’, she said.

The economy would ‘really begin to recover seriously’ at the start of 2022, she said. ‘So you combine all that and you arrive at this extension by nine months.’ The challenge facing not only monetary but also fiscal policymakers, she suggested, was to ‘cross that bridge’ so as ‘to go across the pandemic until such time as immunity is sufficient.’

The additional €500 million to be allocated to the PEPP would allow the preservation of favourable financing conditions, she said. She emphasized that the ECB would purchase assets ‘flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation.’

That, she said, ‘is what has driven’ the Governing Council’s decision.

Lagarde indicated that the ECB would make much use of the PEPP’s built-in flexibility. ‘What we plan on doing is adjust our purchases to what is needed to maintain those favourable financing conditions’, she said. ‘That will entail variable purchases … not necessarily fixed, monthly, linear purchases, but purchase that will adjust.’

Whereas the ECB had previously committed to using all the funds available under the PEPP, Lagarde made clear that this was no longer the case.

‘If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full’, she said. ‘Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.’

In other words, she reiterated later, ‘[t]he envelope can be increased, if necessary.’

As for the minimum possible interest rate on the targeted longer-term refinancing operations (TLTROs), which was maintained at what Lagarde called a ‘very attractive minus 100 basis points’, she underscored that ‘we should not assume and nobody should assume that this is a rate that is available come what may … it is a rate that is intended to incentivize the banking sector to provide financing to the economy.’

Based on the bank lending survey and other surveys, the ECB was ‘beginning to see a little bit of tightening’, she said. This was ‘not so much about the rate but about the terms and conditions that are offered to borrowers.’

Lagarde reminded that the exchange rate was no target of the ECB, even if it ‘clearly … plays an important role and exercises downward pressure on prices.’ For that reason, the ECB would ‘continue to monitor it very carefully going forward.’

Were the need to arise, monetary policymakers ‘stand ready to continue to recalibrate, readjust and use all tools’, she said, including interest rates.