ECB Brief: Echoes of September 9 at Lagarde EU Parliament Hearing; Optimistic Again on Recovery

27 September 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde, in her introductory statement at Monday’s hearing of the Committee on Economic and Monetary Affairs of the European Parliament, echoed much of the language she used at the press conference following September’s monetary policy meeting of the Governing Council.

She was perhaps a touch more hawkish on the economic outlook and focussed more clearly on the upside risks to inflation than on the downside risks, which she mentioned perfunctorily. Lagarde was again sceptical of stronger wage growth:

• Paragraph on inflation risks mentions downside risk in form of further containment measures, but the focus is clearly on factors ‘that could lead to stronger price pressures than are currently expected.’
• Again sees ‘limited signs’ of stronger wage developments, ‘which means that our baseline scenario continues to foresee inflation remaining below our target over the medium term.’
• Currently elevated inflation is ‘largely temporary’, due to factors that ‘should dissipate in the course of next year.’
• Recently higher underlying price pressures reflect ‘the opening up of the economy, which remains some distance away from operating at full capacity.’
• The easing of market interest rates over the summer, recently reversed ‘somewhat’, has overall ‘left financing conditions for the economy remaining very favourable.’
• Calls the euro area economic recovery ‘increasingly advanced’ without immediately qualifying the statement, and then predicts ‘strong growth in the second half of 2021, enabling euro area output to exceed its pre-pandemic level by the end of the year.’
• Says the outlook is ‘uncertain and heavily dependent on the evolution of the pandemic, but risks to growth are broadly balanced.’
• One of the ‘two key innovations’ of the ECB’s new strategy, the new inflation target ‘will avoid misperceptions about our reaction function when medium-term inflation is above or below the target and that it will better anchor inflation expectations.’
• ‘The second important change is the recognition that … [i]n proximity to the lower bound, an especially forceful or persistent monetary policy response will be required.'
• Recites the new forward guidance, according to which achieving the three conditions for the ECB to ‘consider raising rates … may imply a transitory period in which inflation is moderately above our target.’