ECB’s Lagarde: Near-Term Outlook Uncertain; Can’t Be Complacent
22 March 2021
By David Barwick – FRANKFURT (Econostream) – The near-term outlook remains uncertain and the European Central Bank is prepared to adjust its policy stance as warranted, ECB President Christine Lagarde said Monday.In a blog post on the website of the ECB, Lagarde said that ‘while much progress has been made and we can see light at the end of the tunnel, we cannot be complacent.’
She continued: ‘The near-term economic outlook is subject to uncertainty, relating in particular to the dynamics of the pandemic and the speed of vaccination campaigns. We therefore 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.’
Assessing the favourability of financing conditions ‘requires a joint test that appraises the prevailing financing conditions against the euro area’s economic and inflation outlook’, she wrote.
Each such assessment considers the change in financing conditions along with the cause and the speed of the change and how the change affects the ECB’s attempt to restore inflation to the projected pre-pandemic path, she said.
Lagarde suggested that such an assessment would take place quarterly, given that the macroeconomic forecast exercises already ‘provide an appropriate platform for incorporating all the information that is relevant for us to conduct such a joint assessment.’
However, the ECB can adjust its purchases anytime if ‘potential changes in market conditions’ warrant it, she said. On March 11, for example, the Council saw ‘a risk that the repricing in long-term bond yields could be inconsistent with offsetting the negative pandemic shock to the projected inflation path’, she said.
In this context, Lagarde noted that higher inflation over 2021 was mainly due to transitory effects, with underlying price pressures seen remaining tame in the presence of economic slack. The medium-term outlook as of March 11 was thus much as in December, when staff forecasts called for HICP of 1.4% in 2023.
‘In this environment, a sizeable and persistent increase in market-based interest rates, if left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy at a time when preserving favourable financing conditions still remains necessary to underpin economic activity and safeguard medium-term price stability’, she said.
Pandemic emergency purchase programme (PEPP) asset purchases would thus be ‘significantly’ faster over the next quarter, she reiterated.
However, if fewer purchases nevertheless allow the safeguarding of favourable financing conditions, the ECB can purchase less, she reminded. Conversely, she added, ‘we need to purchase more when we see a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation.’