ECB Brief: Behind Closed Doors, Upside Risks More Openly Acknowledged

14 May, 2021

By David Barwick – FRANKFURT (Econostream) – The display of dovishness by European Central Bank President Christine Lagarde following the last Governing Council meeting may not have faithfully reflected the sentiment of the entire Council during the preceding monetary policy deliberations.

To recall, at the press conference following the meeting of 21-22 April, 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 proved unable or unwilling at the press conference to refer explicitly to anything but ‘downside risks’.

This is now seen to be at clear odds with the account of that meeting released Friday by the ECB, in which it was reported that while the general view was ‘that risks to activity had become more balanced over the medium-term horizon’, some subset of the Council felt that the risks ‘were now marginally tilted to the upside.’

The decision to keep the March risk assessment unchanged was the product of what the meeting account called ‘broad agreement’, which presumably failed to include not only those who saw medium-term risks as tilted to the upside, but also any members who took the more cautious view that they were simply balanced.

The account suggests in its typically guarded language that those who did not support the agreement were consoled with the possibility of another chance six weeks thence, when the risk assessment ‘could be revisited more fully in the context of the June staff macroeconomic projection exercise.’

The discordance between Lagarde’s tone at the press conference and the content of the preceding discussion is seen to have extended to the subject of inflation as well, with someone evidently arguing during the meeting that risks to the inflation outlook ‘could be assessed as tilted to the upside.’

Indeed, according to the account, ‘the implications of higher headline inflation during 2021 for inflation expectations and possible second-round effects would need to be monitored.’

Speaking to the press, however, Lagarde observed merely that ‘in terms of inflation numbers we are also on the same page as we were with our projections back in March.’

Of course, even had there been a shift in tone on April 22 in line with largely positive developments, this would have been highly unlikely to be accompanied by any action at a meeting from which no action was expected and at which Council members lacked updated staff forecasts on which to base action.

It was thus always a matter of the guidance her post-meeting comments would bring as to where things might be headed a bit further down the road, especially in June, when revised staff projections become available.

To the extent she downplayed expressions of optimism about Council members’ assessment of the outlook, Lagarde’s performance at the press conference may have failed to steer observers in the right direction.