ECB’s Lagarde: Conditions for Rate Lift-Off ‘Very Unlikely to Be Satisfied Next Year’

3 November 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Wednesday suggested that it was highly improbable that an initial interest rate hike would occur next year.

In a speech marking the 175th anniversary of Banco de Portugal, Lagarde said that the ‘conditions for a sustained recovery’ were in place and that euro area GDP would return to pre-pandemic levels by end-2021, but cautioned that ‘growth momentum is moderating somewhat owing to the effects of supply bottlenecks and the rise in energy prices.’

‘Market interest rates have risen over the past weeks, mainly as a result of greater market uncertainty about the inflation outlook, spillovers from abroad to policy rate expectations in the euro area, and some questions about the calibration of asset purchases in a post-pandemic world’, she said.

The three conditions established by the ECB for official interest rates to start rising ‘are very unlikely to be satisfied next year’, she said, given that medium-term inflation prospects remain ‘subdued’.

The pandemic emergency purchase programme (PEPP) continued to underpin favourable financing conditions, she said. ‘An undue tightening of financing conditions is not desirable at a time when purchasing power is already being squeezed by higher energy and fuel bills, and it would represent an unwarranted headwind for the recovery’, she said.

The ECB would reveal in December how asset purchases would look ‘in a post-pandemic world’, she said. ‘Even after the expected end of the pandemic emergency, it will be still important that monetary policy – including the appropriate calibration of asset purchases – supports the recovery and the sustainable return of inflation to our target of 2%’, she added.