ECB’s Lagarde: Policy Support Will Be ‘Needed Until Well Into the Recovery’

14 April 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Wednesday said that policy support would need to remain in place until long after the economic recovery has begun.

In an event with Reuters, Lagarde said that ‘[w]e are still clearly dealing with a pandemic crisis’ and ‘are still swamped with uncertainty’. Every day there are developments that underscore this, she said, citing vaccine-related snags and increases in hospitalisations.

‘So we consider that both fiscal and monetary support are needed and will be needed until the pandemic crisis is over’, she said. The economy is like a patient who is ‘out of the deep crisis but still on two crutches.’

Both crutches, akin to fiscal and monetary policy support in the context of the economy as it emerges from crisis, must be left in place, ‘so to me that means support well into the recovery’, she said ‘For the moment that support is needed, and that will be needed until well into the recovery.’

Europe will return next year to pre-pandemic growth, but ‘[t]he world is not going to be safe until everybody is safe’, she said. ‘Vaccination is a key, and it’s a key the world over.’

Lagarde played down faster vaccination progress in the US versus Europe, insisting that ‘it’s not only related to vaccination’, but also to the fiscal response and the change in leadership.

In particular, the US fiscal stimulus is an upside factor for Europe, she said. The ECB’s ‘preliminary assessment’ is that it would add about 0.3% to GDP and 0.15% to inflation over the medium term, she said.

This was ‘clearly an upside risk that we are seeing in the medium term’, she said. The ‘major impact’ on growth would occur next year, she said, with a 0.2% impact.

As for the possible unwelcome consequences of the rapid US recovery and whether the US fiscal stimulus might be overdoing it, ‘[t]he jury is out’, she said. ‘When I look at those who take the floor on this issue and who know the US economy better than anyone else, you have a large majority that you will not have significant inflation arising out of this fiscal stimulus.’

In terms of the impact on euro, this ‘is positive as far as we’re concerned’, she said. ‘We also have monetary policy instruments and responses in order to resist those yield increases that we would see as unwarranted or premature.’

There is ‘no question’ that bankruptcy filings will increase in the coming period, she said. Governments must ‘distinguish between liquidity and solvency problems’ and ensure that liquidity constraints do not turn into a solvency crisis, she said.

The ECB’s reaction function ‘has been very clearly identified back in December, and the reaction function is to preserve favourable financing conditions’, she said. ‘And this is clearly something that we’re going to stick to and that we’ve clearly demonstrated with our latest decision in March’.

Favourable financing conditions are necessary both for the recovery and ‘for our price stability mandate to be respected’, she said. ‘They go hand in hand.’

Step one is to evaluate financing conditions at a given moment with respect to how they were previously. ‘Step two, how do conditions help us get back to the pre-pandemic inflation path? And it’s on the basis of that assessment that we determine our monetary policy.’

The assessment is not ‘on a daily basis or a weekly basis, we need to have a longer horizon than that.’, she said. But the Governing Council’s decision in March ‘has had an impact and continues to have an impact.’