ECB’s Lagarde: Rising Market Rates Could Cause Prematurely Tighter Financing Conditions

21 June, 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Monday reiterated her warning that if unchecked, increasing market rates could cause an unwanted tightening of financing conditions.

In her introductory statement at an appearance before the Committee on Economic and Monetary Affairs of EU Parliament, Lagarde used similar – indeed at times identical – language to that of the last press conference on June 10 to describe economic developments and the state of monetary policy.

Borrowing conditions had remained ‘broadly stable’, while market rates had increased further, she said. This in part reflected a brighter economic outlook, but ‘a sustained rise in market rates could translate into a tightening of wider financing conditions that are relevant for the entire economy’, she warned.

‘Such a tightening would be premature and would pose a risk to the ongoing economic recovery and the outlook for inflation’, she said.

The Governing Council thus reconfirmed its policy stance and would make pandemic emergency purchase programme (PEPP) purchases ‘over the coming quarter at a significantly higher pace than during the first months of the year’, she said.

The asset purchases and targeted longer-term refinancing operations (TLTROs) enhance the effect of other ECB measures such as the negative deposit facility rate, she said, citing ‘clear evidence that cutting the deposit facility rate below 0% has provided additional economic stimulus as it has fed into lower lending rates, thereby helping to improve overall financing conditions for firms and households.’

Despite criticism related to the ‘potential’ consequences of negative rates, the ECB’s overall experience ‘continues to be positive as the benefits continue to outweigh the costs’, she said, calling the tiering system ‘an effective mitigation tool for the banking sector.’

Lagarde described the economic outlook as ‘indeed brightening’ in line with a better pandemic situation and higher confidence. Activity would pick up speed starting in the current quarter, she said, though supply shortages ‘could generate some headwinds for industrial activity in the near term.’

‘Looking ahead, we expect economic activity to improve strongly in the second half of 2021, supported by a robust rebound in consumer spending and solid business investment’, she said. Reiterating the ECB staff growth forecasts, she again characterized risks as ‘broadly balanced’.

Underlying price pressures would remain subdued despite an increase this year due to passing supply constraints and stronger domestic demand, she said.

‘International spill-overs from US inflation can be amplified if people in the euro area shape their inflation expectations also on the basis of developments in the United States’, she said. ‘Overall, however, the effects on euro area HICP inflation are expected to be moderate.’