ECB Insight: Perception of Policy Inflection Point Avoided as ECB Claims ‘Steady Hand’

10 June 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Thursday acknowledged more frankly than previously the emerging economic recovery while firmly rejecting in familiar language the idea that tapering had been or would soon be on the Governing Council’s agenda.

At the press conference following the ECB’s monetary policy meeting, Lagarde summed up the prevailing sentiment at the gathering as one of a ‘steady hand’, a phrase well chosen to convey the idea that nothing had really changed - so that policy had not arrived at an inflection point - and to reassure the nervous that the ECB could be counted on to continue providing the accustomed level of support.

In conjunction with a medium-term inflation outlook that was unrevised and thus, at 1.4% in 2023, still well removed from the ECB’s objective, her assurance that the central bank was staying the course freed her to acknowledge the economic reality on the ground and predict in a much less gloomy tone than hitherto a strong recovery amid risks that, for the first time since the pandemic, were assessed as ‘broadly balanced’.

‘We were somewhat more optimistic about the economic outlook than we were three months ago’, she said, suggesting that with the lifting of public health constraints the service sector in particular would experience a ‘vigorous bounce-back’.

Indeed, ECB staff’s macroeconomic projections underwent in part substantial upward revisions of 0.6 percentage point for both this year and next.

But that was not problematic from an inflationary point of view, she explained, as the labour-intensive service sector was not generating any meaningful wage pressures and there would only be a ‘gradual increase in underlying inflation over the medium term’.

And financing conditions? Though apparently justifiying the 'steady hand', Lagarde appeared visibly less concerned about relevant developments than in March, readily conceding that the recent increase in market rates were ‘partly reflecting improved economic prospects’.

But still, and as expected, Lagarde wanted nothing to do with tapering. Asked, she explicitly invoked her robust dismissal of the subject last month and replied, ‘There’s no point losing ourselves in conjecture … it’s too early, it’s premature, its unnecessary to discuss those longer-term issues. … It will come in due course.’

She did not give any indication of when ‘due course’ might be, but a slowdown in the pace of pandemic emergency purchase programme (PEPP) asset purchases seems an inevitable feature of today’s Governing Council decision that, while not quite glossing over, she obviously did not wish to dwell on.

The ‘significantly higher pace’ versus January and February at which PEPP purchases will be conducted going forward will be ‘according to market conditions, which clearly include seasonality’, she said. As seasonality at the relevant time of year – the summer – means reduced liquidity, Lagarde was essentially conceding that monthly average purchases may not be quite as ‘significantly higher’ as they were.

The beauty of this is that it is a natural market development that was fully anticipated anyway. If thereafter, amid what in the meantime should be widespread herd immunity and an even more robust recovery, the ECB does not quite return to pre-summer purchase levels, this could be a convenient way to commence the process of winding down the PEPP whilst potentially softening the tone of a debate the ECB clearly does not relish.

The concession to seasonal developments may have served yet another useful purpose: along with the assessment of growth risks as ‘broadly balanced’ and the acknowledgment that higher market rates in part reflected brighter economic prospects, it may have been a way of finessing what Lagarde referred to as ‘here and there a couple of diverging views’ on the proper pace of purchases.

This in turn made it possible for her to report ‘unanimous support for the introductory statement’, reinforcing at relatively low cost the desired dovish effect of the ECB’s policy decision and her elaborations on it.

On the face of it, the meeting seems to have gone the way of the policy doves, which was not unexpected, also in view of the relative quiescence in the last weeks of the hawks. It is not hard to imagine though that the doves may have to wait a while before again getting their way as easily, though it is also not excluded that the meeting account will reveal that the hawks put up stiffer resistance today than Lagarde let on.

For now, the ECB seems to have effectively bought more time, but tapering cannot for much longer remain one of ‘those longer-term issues’.

The official account of this meeting is to be published on July 8.