ECB Insight: Lagarde Puts Big Decisions Off To December; ‘More Substance to Chew on’

9 September 2021

By David Barwick – FRANKFURT (Econostream) – As suggested in this space some weeks ago, European Central Bank President Christine Lagarde on Thursday deferred to December major pending decisions of the ECB Governing Council.

Widely expected to strike a dovish tone so as to squelch potentially hawkish expectations following the apparently unanimous decision in favour of a ‘moderately lower’ pandemic emergency purchase programme (PEPP) purchase pace, Lagarde, if anything, was a hair less dovish than she might have been.

Unsurprisingly, she was unwilling to call that decision tapering, ‘because what we are doing is recalibrating PEPP … and we are recalibrating just as we did back in December and back in March.’

On growth, however, Lagarde stuck to her newfound optimism. ‘The rebound phase … is increasingly advanced’, she said, with output in the area to top pre-pandemic levels by year’s end. The region is ‘on track for strong growth in the third quarter.’

While cognizant of the growth risks, including the possibility that ‘the global spread of the Delta variant could yet delay the full reopening of the economy’, Lagarde continued to characterise these risks as ’broadly balanced’, and pushed back against the implication of one question that the ECB might be going out on a limb of sorts with its PEPP deceleration.

‘Are we confident enough?’ she asked rhetorically. ‘Well, the September meeting is conducted in the light of our projections, and what we are seeing is clearly an improvement on many fronts.’

On the basis of all the evidence and in particular given vaccination progress, which, she reminded, the ECB had always regarded as crucial, ‘we believe that the euro area economy is rebounding, and that gives us the confidence to take the measure that we are taking.’

Still, revisions to June staff GDP projections, standing now at 5% for 2021 (previously 4.6%), 4.6% for 2022 (4.7%) and an unchanged 2.1% for 2023, did not indicate a fundamentally changed perspective beyond the current year.

Similarly, Lagarde was scarcely more optimistic about the medium-term inflation outlook, even if she at one point spoke of a ‘significant improvement of the inflation numbers for 2022 and 2023.’

In a bow to reality, the ECB predicted inflation in the current year would come in at 2.2% (previously 1.9%), but then subside to 1.7% (1.5%) next year and, still well removed from price stability, 1.5% (1.4%) in 2023. Many analysts had seen the 2023 forecast being upgraded to 1.6%, with some even suggesting an outcome of 1.7%.

Current upside pressures were ‘largely temporary and underlying price pressures are building up only slowly’, Lagarde said. The latter would show an ‘only gradual’ increase over the medium term.

The ECB president repeatedly fended off questions about the asset purchase programme (APP) and the PEPP’s future with a reference to December, as in: ‘We have not discussed what comes next, and this is something for which we will prepare in the months to come’. Discussions will be ‘more interesting … in December.’

Or: ‘That’s a discussion that we will address comprehensively at our December meeting.’

And, on APP purchases post-PEPP: ‘And that clearly is intended to be continued and will be debated, as I said, at our December meeting. So it’s premature to evoke it.’

December would bring valuable new information in the form of the first staff macroeconomic projections for 2024, she reminded. ‘So we will have more substance to chew on in order to discuss the terms and conditions of the PEPP term’, she said.

Still, wittingly or not, Lagarde confirmed that an end to the PEPP next March, to occur in the absence of an explicit extension, was no given, asserting as she did that ‘[t]he day when PEPP is over will presumably indicate that financing conditions are favourable, and that the economy will have recovered in such a way that the downward impact of the pandemic on our inflation outlook has been resorbed.'

If she meant by that to state the conditions for an end to the PEPP, rather than to voice optimism about the circumstances she expects now to prevail next March, Lagarde may have been setting the stage for a PEPP extension.

A possible compromise along those lines, assuming currently favourable financing conditions play along, would be to extend the PEPP at a yet slower purchase pace than that of 4Q and, presumably, of 1Q, for the three to six months it would then still take to exhaust the envelope.