ECB’s Lagarde: Higher Asset Purchase Pace Will Be Visible Over Time

18 March 2021

By David Barwick – FRANKFURT (Econostream) – The increased pace of asset purchases by the European Central Bank will become evident over time despite short-term noise, ECB President Christine Lagarde said Thursday.

In her introductory statement at the Hearing of the ECON Committee of the European Parliament, Lagarde said that the ECB’s decision to ‘significantly’ step up the pace of asset purchases reflected the conclusion that rising risk-free market interest rates and sovereign bond yields could cause overall financing conditions to tighten, she said.

‘Therefore, if sizeable and persistent, increases in those market interest rates, when left unchecked, may become inconsistent with countering the downward impact of the pandemic on the projected path of inflation’, she said.

Weekly asset purchase data will be affected by ‘short-term noisy factors – such as occasionally lumpy redemptions’, she said, but over time the acceleration will be apparent.

The precise amounts will depend on market conditions, but always serve to keep financing conditions favourable, in line with restoring the projected path of inflation to where it was before the pandemic, she said.

If it is not necessary, the envelope will be not expended in full to keep financing conditions favourable, she said, but ‘equally’, it can also be recalibrated.

‘We will also continue to monitor developments in the exchange rate regarding their possible implications for the medium-term inflation outlook’, she said. ‘We stand ready to adjust all of our instruments, as appropriate, to ensure that inflation moves towards our aim in a sustained manner, in line with our commitment to symmetry.’

The ECB’s assessment of financing conditions, she explained, is holistic ‘because we consider a broad array of indicators, spanning the entire transmission chain of monetary policy from risk-free interest rates and sovereign bond yields to corporate bond yields and bank credit conditions’, and multi-faceted, ‘because we take a sufficiently granular view that enables us to detect movements in specific market segments in a timely manner.’

Lagarde spoke of ‘idiosyncratic factors which are currently pushing inflation up but which can be expected to fade out early next year.’ Despite some increase this year, underlying price pressures will generally stay weak, ‘also reflecting low wage dynamics and the past appreciation of the euro’, she said.

‘Once the impact of the pandemic fades, the unwinding of the high level of slack, supported by accommodative fiscal and monetary policies, will contribute to a gradual increase in inflation over the medium term’, she said, adding that inflation expectations remained subdued.

The Eurozone economy would contract for a second quarter in a row this quarter but give way to ‘a firm rebound … in the second half of 2021’, supported in the medium term by favourable financing conditions and fiscal accommodation, she said.

She reiterated the assessment of risks as having ‘become more balanced’, with the near term still subject to downside risks related mainly to the pandemic.