ECB’s Lagarde: Would Err on the Side of Not Making Long-Term Commitments

3 December 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Friday confirmed that net assets under the ECB’s pandemic emergency purchase programme (PEPP) would probably end in March, but suggested that the upcoming Governing Council meeting would provide clarity without making long-term commitments, given high uncertainty.

In an interview during a Reuters event, Lagarde said, ‘Under current circumstances, I’m confident that we will stop our net asset purchases under PEPP [in March], and as I said in the past, this is the plan we have at the moment. But it does not mean to say that we don’t act, we don’t operate, including on markets.’

Reinvestment of maturing PEPP purchases, of which there will be a lot, means by itself that ‘we are not without ammunition’, she said. ‘And we have other tools in the box’, including ‘whatever the Governing Council in two weeks’ time - just after the Fed, by the way – will decide to do.’

Questioned about the possibility that the Governing Council would not seek to be too ambitious at the December policy meeting, Lagarde said she believed that ‘[w]e need to give some clarity to markets, to the people of Europe, to what we project in terms of numbers, both on the growth account, on the inflation account, and then we need to determine our policy then.’

‘So, I’m not giving you any signal today because it is the prerogative of the Governing Council on December 16 to make a decision, but I think we need to give clarity, because otherwise we just add uncertainty to uncertainty’, she added.

As for the scope of the possible outcome, she said, ‘you know there are ways to give clarity without making long-term commitment. I would err on the side of not making very long-term commitment, because there is too much uncertainty. But equally, we need to very clearly indicate that we stand ready, in both directions.’

However, she continued, ‘it is very unlikely that we shall see an interest hike in the course of 2022.’

Lagarde vowed that ‘when the conditions of our forward guidance are satisfied, we will not hesitate to act’, and predicted again that inflation would redescend next year.

‘I see an inflation profile which looks like a hump’, she said. ‘So it has clearly increased over the last three quarters … But we see … a hump, and a hump eventually declines, and this is what we project for ’22, that inflation will decline over the course of ’22. … we are firmly of the view and I’m confident that inflation will decline in ’22.’

Although inflation would be ‘going towards our target in the course of ’22’, Lagarde said she was ‘a bit prudent for obvious reasons, because the decline from the top of the hump is going to depend on how long we stay at the hump. We believe that we are now at that high level of the hump and that it will start declining.’

‘Supply bottlenecks are going to continue to weigh on prices, we know that’, she said, and corporate contacts indicate that ‘it’s not going to be a matter of three months, it will take more than that.’

Still, a ‘slight’ decrease in delivery times in November could mean, if confirmed in December, that things are ‘going toward a normalisation', she said. Normalisation wouldn’t occur overnight, ‘but it would be an indication of the direction of travel.’

The ECB is ‘also trying to understand exactly how wages are going to evolve, because this is a critical factor for us,’ she said.

As to the latest variant of the coronavirus, Lagarde said that the economic consequences would depend on containment measures, but that experience should stand economies in good stead.

‘We should be on alert, but I think we should also take some confidence from the fact that we have learned to live with previous variants’, she said.

The pandemic wave ‘as we are experiencing currently in the euro area …. was something that we had included in our adverse scenario’, she said.