ECB Insight: Lagarde Interview: Some PR, a Few Policy Insights and a Reprimand

29 November 2021

By David Barwick – FRANKFURT (Econostream) – The interview that came out late Friday with European Central Bank President Christine Lagarde was not devoid of insights beyond the probably futile attempt to bolster her standing among citizens of the euro area’s largest member economy, not too delighted with the ECB to begin with and now also up in arms about rates of inflation last seen almost three decades ago.

One need read but the first few sentences of the interview, in German weekly Frankfurter Allgemeine Sonntagszeitung, to suspect that Lagarde is still smarting from the recent reporting of another German newspaper, mass circulation daily Bild, which calls her “Luxury Lagarde” in reference to her fondness for apparel far beyond the financial reach of all but a privileged few.

Just under a month ago, Bild garnered considerable attention for a piece in which it calculated that the per capita loss among German savers this year due to high inflation was €1,400 and thus the symbolic equivalent of one sleeve of a particular Chanel blazer preferred by Lagarde and bearing a price tag of about €7,000.

On Friday, Lagarde was at pains to convey sympathy for those less likely to be wearing anything by Chanel. ‘Those who are less privileged and less well off are the ones who suffer the most from inflation’, she said. ‘That’s why we need to keep looking at it very carefully.’

Lagarde embraced the chance to emphasise the weighty impact of inflation on her own daily life. ‘You can’t help noticing the price increase when you fill up your tank at a petrol station or buy heating oil for the winter’, she said. ‘As a French person, I keep a close eye on the prices for good bread at the bakery.’

In 2020, Lagarde’s basic salary as ECB president was €416,000, ‘basic’ meaning not including a wide range of other significant benefits. If she keeps a ‘close eye’ on bread prices, it cannot be because any conceivable change in them would have a perceptible impact on her wallet.

One might also reasonably speculate about how often Lagarde, normally chauffeured in a car furnished by the ECB and housed in a residence also provided by the ECB, personally fills her tank or buys her heating oil.

As for Germans’ special preoccupation with high inflation based on cultural and historical reasons, ‘I understand all that’, she said.

Unfortunately for Lagarde, each edition of Bild is read by an estimated 7.8 million people, about ten times the figure for the Frankfurter Allgemeine Sonntagszeitung, while Bild’s website was visited almost 400 million times in a recent month, making it the clear leader among German news portals.

The overwhelmingly negative comments left by readers of the interview on the web page of the Frankfurter Allgemeine Sonntagszeitung gave scant reason to think that Lagarde managed to win over many German heads, let alone hearts.

In any event, her concern for the plight of the other 99.9% duly demonstrated, Lagarde turned more directly to monetary policy, reiterating various talking points she and other members of the Executive Board have been hammering home for some time:

• Inflation will cool down next year, there is no dis-anchoring of expectations and ‘somewhat higher wage demands’ to be expected next year should not lead to a wage-price spiral, so that the effect of policy tightening implemented now would be felt when inflation would have redescended anyway.
• Supply bottlenecks will gradually ease and energy price developments at least stabilise next year.
• When the ECB sees ‘inflation reaching our 2% target over the medium term, durably and sustainably – meaning not just for a short period of time – then the interest rates can rise again. … Before we can raise rates, however, we will need to reduce our asset purchases.’
• There is ‘no reason to doubt that we will stop net asset purchases under the PEPP [pandemic emergency purchase programme] in the spring.’

All that is old news, but Lagarde also offered specific reasons to think that the odds are ultimately stacked against inflation. Globalisation ‘will proceed and will in all likelihood continue to temper inflation’, she said. ‘…all in all, I see factors that will suppress inflation in the longer term rather than factors that will drive it up.’

Only at the last monetary policy meeting of the Governing Council, according to the account released just Thursday, had one or more members ‘suggested that, as a result of current experiences, there could be some reversal of the past globalisation of manufacturing.’

And while the climate transition could temporarily boost inflation by making energy more expensive, she said, ‘when demand falls, the price will drop significantly. This effect will materialise.’

Lagarde was not quite as unambiguous about the climate transition’s inflation impact in a speech ten days ago, when she said of the longer-term outlook that ‘a global shift away from emission-intensive energy could lead to a sustained demand for gas as a transition fuel, resulting in further periods of price volatility.’

Other Council members have yet more directly expressed the idea that climate change would boost inflation. In an interview earlier this month, Banque de France Governor François Villeroy de Galhau, asked if the adjustment to climate changes meant an era of permanently higher inflation, replied that ‘[i]f the transition involves an increase in the price of carbon, which is desirable, this will have a gradual effect on the inflation trajectory.’

Side effects were not currently the dominant consequence of asset purchases, Lagarde affirmed, though ensuring the proportionality of this instrument’s use required careful attention to such a possibility. For now, ‘the impact of the bond purchases is still positive and clearly outweighs the negative side-effects’, she said.

Finally, Lagarde firmly reproached Austrian National Bank Governor Robert Holzmann, who recently dialled up his rejection of quantitative easing. ‘All opinions are welcome, but they should be expressed at the right time’, she said. ‘That time is 15 and 16 December, when the Governing Council of the ECB meets again.’

With the imminent departure of Bundesbank President Jens Weidmann, Holzmann, whom Econostream ranks at the hawkish extreme of the spectrum of Governing Council members, could potentially become more vocal, especially if Weidmann, as is speculated, is replaced by someone less uncomfortable with the ECB’s profoundly accommodative policies.

As such, Lagarde’s remonstrance, in contradiction of her own practice to ‘not comment on what individual heads of central banks have said’, seems a shot over the bow of the Austrian Council member, and could presage a less collegial relationship between the two.