ECB Insight: Lagarde Mostly Steers Clear of Chances to Shed Light

24 September 2021

By David Barwick – FRANKFURT (Econostream) – Wide-ranging as it was, the interview by CNBC with European Central Bank President Christine Lagarde published Friday yielded less news than might be expected, not because Lagarde was not asked important questions, but rather because she appeared determined to stick to safe ground and avoid further fueling public debate.

For example, Lagarde sidestepped the important question of whether inflation was showing itself to be stickier than at the time of the last forecast exercise, essentially requesting to answer only after the fact rather than now, on the basis of what she called ‘hearsay’.

As an inflation discussion is in full swing in the euro area, with numerous Governing Council members having already weighed in, a more substantive contribution by Lagarde would have been a useful bit of information.

But Lagarde, while admitting that the ECB over the last three quarters had seen itself repeatedly obliged to correct its projections for inflation as well as for growth and employment to the upside, did not draw any meaningful conclusion. Rather, this was in fact ‘good news because it means that our economies are responding, jobs are being created again.’

In the cases of growth and employment this would hopefully last, she said. As for the case of inflation, ‘we think that there will be a return to much more stability in the year to come because many of the causes of higher prices are temporary’, she said, citing the usual reasons while saying nothing about the outlook beyond 2022.

The ECB also hoped employment would return to pre-pandemic levels, implying an ongoing recovery and ‘movement on the inflation front’, she said.

Notwithstanding supply bottlenecks and more expensive energy, current data suggest that ‘we are still in line with our projections’ for growth, Lagarde said. As the interview was conducted exactly two weeks after the current forecasts were issued, any other answer would have been unlikely.

Experience showed that supply constraints would dissipate, she indicated, evoking the examples of ‘tsunamis or very dramatic incidents in Japan, in particular. Everybody thought that it would be damaged and disrupted for the next 12 months. Well, in a matter of three months the supplies were identified, new supply chains were put in place.’

This is very consistent with her comments during the Q&A of the last press conference, when she said that ‘typically what we have seen in previous situations of that nature is that when you have a bottleneck in your supply, you try to find alternatives to that supply. And as a result of that the supply bottleneck impact on inflation is reduced and eventually goes away.’

However, she added during the interview with CNBC, the issue of energy ‘will probably stay with us longer’ given the transition to greener economies. Lagarde was not yet ready to be drawn out on the topic, though, saying that ‘the jury is still out’ on whether the shift away from fossil fuels would be inflationary or deflationary on balance.

Her ‘hunch’, however, was that ‘it's likely to be pushing prices up for a short period of time, and probably later on might have some deflationary impact. But it's very, very premature and early days to say.’

Lagarde reminded that she supported calibration rather than tapering, and reiterated the background of the ECB’s insistence on favourable financing conditions. She declined to be more specific about the ECB’s intention ‘to purchase moderately in the coming quarter’, saying only that the ECB would set precise volumes flexibly to ‘procure those favourable financing conditions’.

Anyone was ‘free to draw their own conclusions on the basis of hearsay, second-hand information, quick look at this or that’, she said in a decidedly dubious dismissal of the Financial Times’ recent suggestion, based on a call between ECB Executive Board member Philip Lane and German private bankers, that an initial rate hike could come at the end of 2023.

Lane – ‘my Chief Economist and my colleague and friend’, she called him, as if to reassure him of her forgiveness even as she denied vehemently that there was anything to forgive - ‘never would have said something like what was alleged to have been said’, she asserted.

While Lagarde did not specify the alleged statement by Lane she was claiming he would never have uttered, if she was referring to the date of a first rate hike, the FT did not actually report that Lane had drawn such a conclusion, but rather only that he had told the German economists that an internal ECB ‘reference scenario’ five years ahead showed inflation returning to 2% soon after the end of its three-year forecast period.

‘Now, of course he would say, and I would say, that if we continue having a good monetary policy in the future, at some stage we must hit the 2% mark’, Lagarde continued. In fact, this is no more or less than what Lane said on a public occasion last week, which is why it also formed the basis of the official denial issued by the ECB at the time of the FT report.

As to why he would naturally say this, the reason offered by Lagarde was simple; ‘Because that's our job; price stability is defined under our new strategy review by reference to the 2% inflation mark, which is identified over a period of time – because we are not going to respond abruptly, we are not going to trust one number. But of course we believe that if our monetary policy is successful, we will indeed hit the 2% inflation. Of course.’

That led to a slightly odd moment as Lagarde’s interviewer contradicted the ECB’s forward guidance, leading the latter to deny that inflation had to be seen at 2% over the entire projection horizon and to repeat the guidance.