ECB’s Lagarde: Global Demand and Vaccination Progress Constitute Upside Risks
8 April 2021
By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Thursday reiterated the ECB’s mantra of short-term economic risks being skewed to the downside, but at the same time cited some upside risks to the outlook.In a statement made at the meeting of the International Monetary and Financial Committee and posted to the ECB’s website, Lagarde said that ‘[i]mproving global demand, also spurred by sizeable US fiscal stimulus, and the progress in vaccination campaigns constitute upside risks.’
This is a rare explicit acknowledgment of upside risks by Lagarde or indeed by any Executive Board member, top ECB officials having been harping for weeks on the downside risks in the short run and generally only conceding ‘more balanced’ medium-term prospects.
Neither at the March 11 press conference following the monetary policy meeting, nor in her appearance before European Parliament on March 18, did Lagarde mention upside risks, even if - using almost the same wording as today - she called global demand, fiscal accommodation and immunisation efforts 'encouraging'.
The mention of these factors now as clear upside risks in the context of a carefully prepared formal statement reflects the evolving view of things at the Eurotower - more meaningfully, though in the same direction, as Lagarde's remark in an interview she gave on March 31, when she went a step beyond previous wording and affirmed that in the medium term, risks are ‘much more balanced’.
In her statement to the IMFC, Lagarde retreated to the more conservative assessment of the risks as being ‘more balanced’, while again noting the near-term downside risks and calling the improved outlook ‘subject to considerable uncertainty’.
‘In this environment, it is crucial to refrain from withdrawing policy support prematurely, either on the monetary or fiscal side’, she said.
She reiterated the assessment of higher euro area inflation this year as a transient phenomenon driven by factors ‘expected to fade out of annual inflation rates early next year.’ Although underlying price pressures would strengthen ‘somewhat’, the euro’s appreciation and weak wage developments would keep them ‘subdued overall’, 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.
The envelope of the ECB’s pandemic emergency purchase programme (PEPP) need not necessarily be depleted, but can ‘equally’ be recalibrated if warranted for the sake of favourable financing conditions, she said.
These being ‘necessary to underpin economic activity and safeguard medium-term price stability’, a premature tightening at the time of the March 10-11 monetary policy meeting would have been unwarranted, she said in explaining the decision to accelerate PEPP purchases.