ECB’s Lagarde: Quite a While Until We Have to Ask Ourselves About Need to Tighten

31 March 2021

By David Barwick – FRANKFURT (Econostream) – It will be quite some time until the European Central Bank needs to think about a possible need to tighten its monetary policy stance, ECB President Christine Lagarde said Wednesday.

In an interview with Bloomberg, Lagarde said that yields had recently risen ‘quite significantly and quite rapidly’. When yields rise because of an economic recovery, ‘and because hopefully there will be a bit of a price pressure exercised on our economy, then we will assess what is needed’, she said.

‘But let me tell you this’, she continued. ‘Given the distance relative to the aim that we have, which is inflation, I think that is going to be quite a while before we actually have to ask ourselves whether we need to tighten at all.’

The precise timing of any tightening would be data-driven, she indicated. Inflation volatility will be overlooked, as a short-term increase in HICP is already expected as a consequence of ‘some technical  temporary factors’, she said.

‘But we're going to see through that because those are not sort of underlying fundamental factors that will increase prices … in a consistent and convergent fashion’, she said. ‘So this will be guided by observation of sustainable solid movements and by our aim which is price stability as defined and our commitment to economic players that we will preserve favourable financing conditions.’

Lagarde expressed the hope that the ECB would ‘be able to resume our sort of less exceptional monetary policy going forward’, but added that she was ‘not seeing any kind of raise in the near future for sure.’

In the meanwhile, financial markets ‘can test us as much as they want’, she said. ‘We have a mandate. We have an aim. We are going to be riveted to that and we're going to do what is required in order to deliver on that.’

The ECB has ‘exceptional tools to use at the moment and a battery of those’, she said. ‘And we will use them as and when needed in order to as I said deliver on our mandate and deliver on our pledge to the economy.’

In the current economic situation of uncertainty, she said, the ECB’s task is to ‘provide as much certainty as possible. And this is really the aim of the most recent monetary policy decisions we have taken.’

Risks remain on the downside overall in the near term, she said. However, in the medium term, risks are ‘much more balanced’, she said, predicting herd immunity ‘at a point in time in the future’.

As to the accelerated pace of asset purchases under the pandemic emergency purchase programme (PEPP), the ECB ‘will reassess in due course on a quarterly basis and in between as well of course to make sure that our monetary policy is in line with our overall price stability objective, but also with the aim that we have of preserving favourable financing conditions’, she said.

Favourable financing conditions would hopefully induce consumption and investment, ‘and this is what we are beginning to see, actually’, she said.

Lagarde decline to state whether the pace of asset purchases the last two weeks would be maintained, saying that the ECB was very attentive to financing conditions according to a range of measures and on this basis would decide what to do ‘with maximum flexibility’.

The PEPP current end date of March 2022 could be made ‘later if determined by the Governing Council, because we would still be dealing with the pandemic crisis and its economic fallout’, she said.

With regard to an end to the ECB’s present highly accommodative stance, financial markets would get ‘sufficient early notice in order to avoid the anxiety the tantrum or any of those movements that have been observed in the past’, she said.

For now, monetary and especially fiscal policy are needed, she said.

The ‘massive’ U.S. fiscal stimulus would entail some spillover to Europe, she said.