ECB Insight: Lagarde’s Policy Panel Suggests an Unsure ECB Watching and Waiting

29 September 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde’s unremarkable contribution on Wednesday to the policy panel of the ECB Forum on Central Banking was probably reflective of the inescapable fact that there remain months to go until the ECB’s next date with destiny, so that for now it is simply waiting and hoping for a bit of clarity to emerge from the fog.

Understandably, Lagarde borrowed from Tuesday’s opening speech: ‘I said yesterday that we’re back from the brink, but not completely out of the woods.’ That the recession was ‘very unusual’ by virtue of having been the steepest since 1975 and was now being ‘followed by a very unusual recovery’ also got fresh air time, as did the prediction that the area would return to pre-pandemic output levels by the end of the year and from there move back to the pre-pandemic growth trend.

It would be inaccurate, however, to say that Lagarde failed to make any additions to her economic diagnosis. For example, demand for services, she said, has been ‘seriously accelerating’, with consumers demanding ‘sometimes more than they had before the pandemic.’

Though interesting, such comments may be less reflective of the perception of a rapidly improving situation than of the natural tendency of people to be more exuberant when unscripted or at least when trying to appear unscripted.

One would be less likely to hear such spontaneous enthusiasm – or even that of her CNBC interview last week, when she said the services sector was ‘coming back in full swing’ - at occasions reserved for the policy pronouncements that matter most.

So it is that in her last monetary policy statement she did no more than drily note that ‘the services sector is benefiting from people returning to shops and restaurants and from the rebound in travel and tourism.’

As yesterday, Lagarde fretted today over supply bottlenecks, though she observed this time that this problem ‘seems to be continuing and in some sectors accelerating’, namely ‘shipping, cargo handling and things like that.’

Is this an indication of growing alarm within the Eurotower with respect to supply constraints? it should be recalled that Lagarde has more than once in recent days invoked the Japanese experience following the earthquake and tsunami in 2011 to suggest that the current bottlenecks would resolve in a reasonable period.

She did not make that optimistic argument today, calling the duration of the supply constraints ‘one of the question marks that we have on our radar screen.’

In addition to uncertainty about energy prices, which she highlighted, there could be ‘potential new waves of a pandemic that would be vaccine resistant’, she said. ‘It doesn’t seem to be the case at the moment, but winter is coming.’

A curious moment was supplied by the moderator, who observed that Lagarde had yesterday ‘seemed to give more emphasis than … before to the upside risks of inflation.’ Everything depends on the ‘before’ being referenced, but if anything, in opening the forum, Lagarde retreated slightly from her most recent, more hawkish language.

And though she did not object to the premise of the moderator’s question, her next comments were not particularly hawkish, including on current inflation (‘largely attributable to the reopening of the economy’), the potential for transitory price rises to have a sustained impact (being monitored ‘very carefully’), inflation expectations (‘still at a distance from our 2% target’) and wages (‘certainly not seeing any widespread contamination of those price increases into wages’).

Lagarde’s conclusion as well hardly corresponded to the moderator’s perception of hawkishness yesterday: ‘So we monitor carefully, but we certainly have no reason to believe that this [sic] price increases that we are seeing now will not be largely transitory going forward.’

One is not always sure exactly what to make of Lagarde’s utterances, but in general would probably be best advised to not necessarily make too much of individual comments that she is not clearly reading. In any event, she had little else to say during the remainder of the panel, which could only have been by design given the ECB’s control of the forum’s organisation.

Given the opportunity to make a final statement, Lagarde played it safe and pleaded for a global effort to vaccinate the world’s citizens: ‘We’ve been very badly hurt by something that just fell on all of us … and my hope is that we have the common sense to see what unites us, and that is our humanity.’

The policy panel of the ECB’s flagship conference would not be the least appropriate venue to offer firm policy guidance. At least, when it would make sense to offer it. Arguably, there was never going to be any on this particular occasion, with one month to go to the October 28 Council meeting – which itself may yield little news – and a whole 11 weeks until the December 16 meeting that is presumably the one to watch.