ECB’s Lagarde: To See Through Current Inflation; Spillover From US Will Be Limited

21 June 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Monday said that the ECB would look through the current period of relatively elevated inflation, and that the spillover from much higher US price growth would be limited.

Answering questions during an appearance before the Committee on Economic and Monetary Affairs of EU Parliament, Lagarde said that US authorities considered the spike in American inflation ‘temporary, transitory and likely to fade as well in the years to come.’

Still, European policymakers must be ‘very attentive’, she said, and ‘also look very carefully at inflation expectations.’ In this regard, she said, ‘[t]here has been an improvement … certainly this is the case for core inflation, excluding food and energy. We need to be very attentive to that.’

Monetary authorities must also be ‘extremely attentive to wage negotiations, which can be of serious consequences’, she said. However, wage developments are currently not ‘at a level that would lead to stronger underlying inflation factors’, she said.

‘We are prepared to see through the current period. We believe that it is temporary and transitory. We believe that the spillover from the US will be limited’, she said.

Bottlenecks and other supply constraints ‘will probably fade out in the near future’, she predicted.

The American Rescue Plan was clearly ‘having a significant effect on the US economy, particularly in 2021 … but we also believe that as such, and because of the fiscal boost that it gives to the economy in ’21, it will also have an impact on the euro area GDP and inflation.’

Although estimates were still ‘very preliminary’, it was assumed that the impact on euro area GDP would be 0.3 percentage point between 2020 and 2023, ‘with a particular impact in 2022’, while the inflation impact would be 0.15, she said.

Lagarde defended negative interest rates, which she said could theoretically go down further. ‘We still have space and room to manoeuvre if needed’, she said. ‘We could certainly use rates and we could move it down if it is appropriate’.

Lagarde said that ‘fiscal and monetary policies have worked hand in hand a lot better during the pandemic crisis, and that has certainly explained why the euro area economy is bouncing back.’

At present ‘it is clear that, and we have said so, additional fiscal and monetary support will continue to be needed in order to support that recovery process’, she said, reminding of her preferred metaphor of ‘crutches’.

It is important ‘not to drop the crutches too early and not to drop one of the crutches too early’, she said. Fiscal policy ‘should not be tightened prematurely’.

Some tightening witnessed recently was ‘largely in anticipation of the lifting of some of the moratoria, some of the guarantees, and clearly some of the concern that the banks have’ about outstanding loans, she said.

A financial crisis of the kind seen in 2008 ‘is not happening’, she said, while admitting that residential property prices could be an instance of unintended consequences of monetary policy. She noted the possibility of price corrections and called on macroprudential policy to address ‘country-specific risks’.