ECB Insight: Another Stubbornly Dovish Performance by Lagarde

22 April 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Thursday was at great pains to sound dovish, so much so that she appeared to suggest rather blithely at one point that the ECB hadn’t really even so much formally accelerated pandemic-related asset purchases as it had simply adjusted the pace to a new normal consistent with the ECB’s policy approach.

At the press conference following the ECB’s monetary policy meeting, Lagarde studiously avoided any reference to upside risks as such. Not that she did not acknowledge that these existed, when – for example – she summed up the current environment as an ‘on the one hand, on the other hand situation’.

But despite having referred to ‘upside risks’ at least twice in the previous weeks and predicted that ‘in the second half of the year there will be recovery that will be moving fast’, Lagarde today proved unable or unwilling to refer explicitly to anything but ‘downside risks’.

Of course, if the same amount of dovishness was justified today as in March - for instance in the absence of any improvement in prospects since March - then that tone might be understandable. Lagarde indicated that this was in fact the case: ‘If we look now at the risk assessment … we still have the same risk assessment as we had back in March, we still see near-term risks tilted to the downside. And we still see medium-term risks much more balanced.’

Indeed, the relevant passage of the introductory statement was almost unchanged today versus March, except that whereas in March medium-term risks to growth had ‘become more balanced’, today they ‘remain more balanced’.

That begs the question: (much) more balanced than what? Than January, meaning they are more balanced in April versus the first month of the year to the same degree as they were already more balanced in March versus the first month? Can that be? Or have they gotten yet more balanced, meaning better, over the course of the last six weeks?

It would seem hard not to believe that the latter is the case, and that is probably what ‘much’ more balanced meant, but this between-the-lines recognition of a net improvement was very far from reflecting Lagarde’s overall tone, for the simple reason that she was visibly striving for dovishness.

But it was not hard to see why she had decided to cast her lot with the Council doves, given how bent she was on driving home the message that the ECB is not close to withdrawing policy support, and in particular that of the pandemic emergency purchase programme (PEPP).

‘Let me just assure you that on the occasion of this Governing Council, we did not discuss any phasing out of PEPP, because it is simply premature’, she said. ‘I would also observe that any determination concerning the pace … is data-dependent.’

The ECB has made its commitment to maintaining financing condition favourability, and based on a joint assessment that considers financing conditions and inflation, ‘we determine the pace of purchase’, she said.

It took further questioning for it to become apparent – as much as anything was apparent – that Lagarde was in effect declaring the ECB to be more flexible about the purchase pace over time than might be assumed from her introductory statement’s repetition of the promise to conduct such purchases at a significantly higher pace ‘over the current quarter’.

‘I don’t know what is the normal pace’, she revealed. The ECB had determined that financing conditions were its intermediary target in December, and demonstrated this in March, she said.

‘So there is no “normal pace of purchases”’, she said as if this had never been a thing. ‘There is a commitment that has been made. There is a joint assessment … to actually jointly assess favourable financing conditions throughout the supply chain of financing’, along with inflation, all ‘with a view to returning to the pre-pandemic inflation path.’

Other than a slip-up, the possibly intended effect of the declaration that there is ‘no normal pace’ is to open the door more widely to maintaining the (de facto elevated) current pace. The ECB would have some leeway to do this for a few months without exceeding the volume of the current PEPP envelope and forcing a recalibration.

Certainly she offered little reason to think a slowdown of PEPP purchases could be justified by the present environment; the question of a reduction ‘has to do with taking a good look at the economis situation’, she said, noting the still-elevated Covid-19 case numbers, ‘the risk of potential evolution of the virus’ and ‘this overall environment of uncertainty … that really surrounds the near term outlook.’

For now, it is clear that the current higher purchase pace will continue. ‘[W]e have decided today to continue to proceed at this significantly higher pace of purchases relative to the first two months of 2021’, she said.

But then, the second quarter throughout which this pace was to be maintained is only three weeks old, and decisions on this were supposedly to be made in conjunction with updated staff macroeconomic forecasts. That the ECB might have decided not to continue for now at the elevated purchase rate was never part of anyone’s expectations for this month’s meeting.

All in all, Lagarde was probably motivated by the simple fact that, as was written in this space two days ago ‘it is easier to promise continued policy support – which she will vow - against a backdrop seen as gloomy rather than sunny. Allaying fears of those concerned about the possibility of an early withdrawal of policy support will be high on her list of priorities.’

The idea that today’s performance would have sat well with the entire Governing Council resists imagination, potentially paving the way for more of the ‘sniping’ already seen in the last few weeks along the spectrum of monetary policy perspectives. Except, of course, in the less likely case that Lagarde’s exercise in dovishness went along with some understanding with which all members were on board.

The official account of this meeting is to be published on May 14.