ECB Brief: Lagarde Offers Some Limited Additional Insight Into Strategy Review Outcome

8 July 2021

By David Barwick – FRANKFURT (Econostream) – This is a quick take on comments made Thursday by European Central Bank President Christine Lagarde at the press conference on the ECB’s strategy review:

• Said, when asked if the outcome of the strategy review effectively deferred the date of monetary policy tightening: ‘I don’t think … we are actually pushing out the potential tightening that would take place.’ This was one of Lagarde’s few unambiguous answers to questions about how the new strategy affects current monetary policy.
• Stubbornly avoided a direct answer when asked several times whether the new strategy’s endorsement of ‘a transitory period in which inflation is moderately above target’ meant that the ECB would merely tolerate overshooting or actually seek it. Lagarde preferred to merely repeat the statement: ‘I want to repeat and reaffirm … that our commitment is to deliver on our target. Our target is 2% … and we recognise that there will be constraints because of the lower bound … as a result of which we know that … we will have to deploy an especially forceful or persistent reaction…this may well imply, for a temporary period, inflation that is moderately above target.’ She particularly emphasised that ‘proximity to the effective lower bound requires forceful or persistent monetary policy action’ so as to ‘avoid that low inflation actually entrenched inflation expectations at a lower level than our target.’
• Rejected comparison to the US Federal Reserve: ‘Are we doing it like the Fed? The answer is no, very squarely. Because there are multiple ways to respond to this lower bound constraint’. ‘Let’s not compare with what others are doing elsewhere.’
• Observed that deviations from target were not always an issue: ‘We know that 2% is not going to be constantly on target … what we are very concerned about is any sustainable, durable significant deviation from the target, and that will require forceful reaction in both directions. … We recognize that the effective lower bound constitutes a constraint, and therefore we have to take specific action simply to maintain the symmetry, and in that situation … an especially forceful reaction will be needed’.
• Provided an example of a 'forceful monetary reaction': 'I would submit that the PEPP … was definitely a forceful reaction with a twofold approach, but certainly a forceful reaction’.
• Praised the new wording of the inflation objective: ‘clear, easy to communicate and provides a strong anchor for inflation expectations’, ‘removes any possible ambiguity … 2% is not a ceiling.’ The new formulation represents ‘a good balancing act between having enough room to manoeuvre … and avoiding the welfare costs of having too high inflation.’
• Underlined importance of standard interest rate policy, calling it ‘not random’ that interest rates were mentioned first. ‘It is very clear to all of us … that the key are the ECB interest rates.’ ‘It is clear that the set of ECB policy rates … will remain our primary instrument. But in a low interest rate environment in which policy rates are more likely to encounter and remain constrained at the lower bound, the ECB will continue to employ other instruments when the need arises.’
• Gave notice not to expect the usual introductory statement starting in two weeks: ‘On the 22nd of July … the introductory statement that I will read to you … will be shorter, crispier, more to the point, less jargonic’; it will be ‘more plain English and easier to understand’.
• Said Eurostat would lead the multi-year project of reflecting owner-occupied housing costs in HICP.
• With reference to the ECB’s previous two-pillar approach, said that ‘[t]he original focus of the monetary analysis has become less important’ and the new strategy ‘recognizes the value of integrating the analysis in a world in which there are multiple feedback channels’.