ECB Insight: Lagarde Prepares to Make the Most of the New Policy Framework
12 July 2021
By David Barwick – FRANKFURT (Econostream) – That the outcome of the European Central Bank’s monetary policy strategy review was a boon to the doves on the Governing Council is clear; comments by ECB President Christine Lagarde over the weekend suggest that the doves could be keen to put their advantage to use at the next opportunity.
In an interview with Bloomberg, Lagarde was at pains – as she had been in presenting the revised framework – to emphasise the unanimity with which the outcome was reached. Unanimity having been indispensably necessary to bring the exercise to a conclusion – as opposed to mere consensus or majority support - the result may not really enjoy the wholehearted support the word ‘unanimity’ would normally imply.
Be that as it may, Lagarde gave little sign that hawkish protests at the June monetary policy meeting would yield any concession in the immediate aftermath of the strategy review. Next week, she said, ‘We're going to look at the circumstances. We're going to look at what forward guidance we need to revisit. We're going to look at the calibration of all … the tools we are using to make sure that it is aligned with our new strategy. And … given the persistence that we need to demonstrate to deliver on our commitment, forward guidance will certainly be revisited.’
In presenting the strategy review outcome last week, Lagarde had had little to say about its ramifications for monetary policy, beyond the questionable reassurance that ‘I don’t think … we are actually pushing out the potential tightening that would take place.’ Speaking on Monday, however, ECB Vice President Luis de Guindos played down the potential ramifications by saying that ‘[t]his is about evolution, no revolution in terms of implementation of monetary policy.’
Lagarde’s view of revisiting all aspects of current policy was devoid of any obvious doubts about the appropriateness of massive accommodation. ‘And my sense is that we will continue to be determined by maintaining favourable financing conditions in our economies, because we want to continue to support this recovery that is underway’, she said.
Asked about a possible reduction in the pace of asset purchase, she said, ‘Not now. Now is not the right time to talk about exit strategy, because we are we are still forcefully delivering under these exceptional circumstances, using exceptional tool which is the pandemic emergency purchase program, which I expect to last at least until March, and possibly to transition into a new format after March.’
One should ‘not start, you know, creating the anticipation that the exit is in the next few weeks, months’, she added.
Not surprisingly, Lagarde’s expression of guarded optimism about the economic outlook emphasised the guardedness rather than the optimism, in which context she predictably invoked the delta variant of the coronavirus.
‘You know, for the moment, we are not revisiting or reducing projections’, she said, as if it were not much too early to consider the possibility, especially given staff forecasts are not to be updated until September. Still, she confessed, ‘we're still seeing this V shaped recovery and a good, good improvement on all fronts … all the signals are good.’
Hawks’ nominal backing of the revised strategy could be sorely tested if doves invoke the new price stability target and other features without regard to the former’s sense that the recovery has progressed sufficiently, and the medium-term inflation outlook become subject to such upside risk, that it is time to give serious consideration to a slowdown of the asset purchase pace.
That hawks are increasingly convinced of this and correspondingly more vocal was already apparent at the June Governing Council meeting. To be sure, Lagarde concealed the widening rift at the subsequent press conference, but the meeting account released last week made it abundantly clear.
It stretches the imagination to think that the hawks will reason that all by itself, a new strategy that is not even all that different from the old one renders invalid all their previous objections. And if their patience was already wearing thin, the suggestion that their willingness to sign off on the strategy review outcome was tantamount to an endorsement of a continued ‘steady hand’ – or yet further accommodation - may rub some of them the wrong way.