ECB’s Lagarde: ‘Persistent’ Means No More Premature Tightening as in the Past

13 July 2021

By David Barwick – FRANKFURT (Econostream) – The reference in the European Central Bank’s new strategy framework to the need for persistent measures to counter undershooting of the inflation target is meant to exclude premature monetary tightening, ECB President Christine Lagarde said Tuesday.

In an interview with the Financial Times, Lagarde, when asked if the new strategy made the ECB more accommodative, said that it allowed flexibility around the 2% target. ‘It is more flexible in that we recognise the effect of the effective lower bound and the constraints that it imposes on us’, she said. ‘And we define very clearly with the especially forceful or persistent response and the strong response that we are prepared to give. And we also accept that it may imply on a transitory basis, moderate deviations above the target. So in that sense, it is more flexible.’

Moreover, she continued, the new strategy is a recognition of the effectiveness of hitherto nonstandard policy instruments. ‘So in that way, I'm not saying that it is more accommodative, but I'm saying that the tools are there and, if they need to be used, we recognise their effectiveness and the fact that some of them, given the effective low bound that we are close to, will have to continue being used’, she said.

As to leaving rates low for longer as a consequence of the new framework, the word ‘persistent’ was ‘an indication that there cannot be premature monetary tightening as we have seen it in the past,’ she said. The new forward guidance would clarify this, she said, but just how was a decision for the upcoming Governing Council meeting.

How the ECB’s new strategy shapes monetary policy ‘will be tested every six weeks from now on’, she said. ‘But I'm not under the illusion that every six weeks we will have unanimous consent and universal acceptance because there will be some variations, some slightly different positioning. And that is fine.’

Lagarde returned to the theme of disagreement among Council members, professing again to be without any expectation of unanimity on all the Council’s decisions. However, the new strategy provided a foundation ‘within which we are going to weave our policy responses over the course of the next five years’, she said.

‘So unanimous agreement on each and every weaving moment is not a requirement’, she said. ‘The more we can agree, the broader the agreement, the better.’

In this context, she added, ‘we should really not undermine or underrate those keywords that we have, which is this especially forceful or persistent reaction, the recognition of the constraint, this sort of gravitational force exercised by the effective lower bound that we have to resist, and the transitory period during which we recognise that our policies may imply a moderate deviation above target.’

At the moment, sufficient forcefulness was less an issue than persistence, she said. ‘It’s being very attentive to the next projection and how both headline, core and other indicators of inflation and inflation expectations will be delivering, to see that the persistence we have demonstrated is actually moving the needle.’

The Governing Council did not consider during the strategic review the question of preserving the flexibility of its pandemic emergency purchase programme (PEPP), Lagarde said. ‘We will discuss those matters because they will matter when we get closer to the end of PEPP, but this has not been a strategy review topic’, she said.

Lagarde stressed the ‘clear and unambiguous prohibition to do monetary financing’, which monetary authorities ‘have to absolutely respect’.