ECB Insight: Lagarde Launches Sintra With Standard Policy Prescriptions and More Neutral Tone

28 September, 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Tuesday took a step back from her recently relatively hawkish language on inflation as she delivered a carefully scripted speech devoid of new policy conclusions to open the ECB Forum on Central Banking.

Monetary policy needed to avoid a premature reaction to passing supply-side developments without medium-term relevance, while at the same time ‘nurturing the positive demand forces’, she said. The ECB’s new forward guidance, she said, was tailor-made for the situation, forestalling undue haste and ensuring patience on the part of authorities.

Moreover, ECB monetary policy would encourage the conditions under which the recovery could thrive, she asserted, citing more appropriate rate expectations and stronger inflation expectations. Over time this would be even more the case, she predicted.

Under such circumstances, private spending was poised to take off as soon as the haze of pandemic-related uncertainty lifted, she said. The fiscal policy contribution would remain important, but its benefits should be distributed in more ‘surgical’ fashion, she said. Monetary policy would continue to focus on the intermediate target of favourable financing conditions, she added.

The policy prescription was not the only part to cover old ground; Lagarde’s assessment of the recovery, which she described as ‘robust’, remained positive overall. Still, she took perhaps somewhat more care to balance her enthusiasm, describing the economy as ‘back from the brink, but not completely out of the woods’, and juxtaposing ‘rapid growth’ and ‘supply bottlenecks appearing unusually early in the economic cycle.’

Similarly, she highlighted the faster-than-expected reattainment of pre-pandemic output levels and predicted that euro area output would reconnect to its earlier trend in 2023, but also noted that supply bottlenecks had had a damping effect of almost 7% on euro area goods exports in 1H 2021.

‘These risks to growth could mount if the pandemic continues to affect global shipping and cargo handling as well as key industries like semiconductors’, she said in perhaps the gloomiest sentence of her intervention.

On inflation, Lagarde reaffirmed her conviction that current developments were ‘mostly a phase of temporary inflation linked to reopening.’ To the extent there was uncertainty, she saw potential for ‘both upward and downward pressures on prices.’

A strong recovery ‘appropriately supported by the right policy mix’ could convince more optimistic consumers to spend more than currently anticipated, boosting inflation in the services sector and supporting wages, she said, but the ability to consume services was limited and joblessness would remain above pre-pandemic levels until 2Q 2023, limiting the upside for wages.

On the supply side, digitalisation-driven globalisation might lead to productivity gains, but supply constraints might also provoke effects that create price pressures, she said. Meanwhile, the inflationary impact of the green transition was unclear, she noted.