ECB Insight: Lagarde Repeats Rate Hike Unlikely in 2022, Passes When Asked About 2023
15 November 2021
By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde’s rejection on Monday of the idea that she had not countered market rate expectations with much strength neatly underscored the true motive for what was indeed the weakness of that pushback.
‘Now, I would like to just correct briefly what you mentioned about the fact that I did not push back on the expectation of a rate hike’, she told a questioner during a regular hearing of the Committee on Economic and Monetary Affairs of the European Parliament.
‘I think I did say very … clearly … that given what we saw, given our forward guidance and the … three conditions that have to be satisfied, it was in my view very unlikely that we would see any kind of rate hike or tightening in the course of 2022’, she continued. ‘And I’m … standing by those statements.’
‘I don’t think I would venture into 2023, but certainly for ‘22 I repeat that point that I made at the time’, she added, thus rejecting the questioner’s explicit attempt to prompt her to expand the scope of her pushback.
The fact that Lagarde declined to do so is more than anything else a reflection of the uncertainty that also led her in the first place to show restraint in countering market rate expectations.
Put another way, Lagarde and the institution she leads are not sure that it’s the markets that have it wrong. All they can really be sure of is that there are competing views, and market expectations aren’t in line with how the ECB tentatively sees things.
That is, how it sees things as of the last update of the macroeconomic forecasts more than two months ago. In terms of how the ECB will see things as of the conclusion of the next such exercise in one month, or the one after that, the projections from September may have unusually little predictive power.
Lagarde’s preference for playing it safe by not pushing back too hard about 2022, and by avoiding a stance on prospects for thereafter, is thus understandable. Whether she might wish to be clearer about the extent to which the ECB is groping about in the dark is another matter.
In other comments, Lagarde told another questioner that wage developments were ‘a key item that we are monitoring very carefully and trying to get as much intelligence as possible on.’ However, wage growth would probably wind up weaker this year than last, she said.
‘Looking forward, which is far more interesting but also more adventurous in many ways, we try to get as much information as possible’, she said. ‘It seems to us that the salary negotiations that will take place and will be implemented in the course of ’22 will lead to … higher negotiated wages in ‘22 than in ‘21’.
Second-round effects were the most important issue for inflation, she said, ‘[b]ut we don’t see any evidence of that’. Although ‘price negotiations have ticked up a little bit’, she said, ‘we don’t see … those significant increases that would lead us to believe that there will be second-round effects.’
The ECB would in any case continue to be patient, she indicated: ‘[I]f we were to have any kind of tightening approach to the current situation, it would actually do more harm than good, and it would begin having an impact at a time when inflation is actually returning to lower levels.’
At its December meeting, the Governing Council would consider new macroeconomic projections including, for the first time, 2024, and would ‘look at the health and sanitary situation to assess … whether this pandemic crisis phase is indeed over or not’, she said. ‘And I think that it is on the basis of those numbers and the circumstances then that we will roll out what we plan for PEPP [pandemic emergency purchase programme] and post-PEPP.’
The ECB in December would share its asset purchase concept for a ‘post-pandemic world’, she said, reiterating the need ‘to be persistent in order to entrench the recovery’.