ECB Insight: Lagarde Likely to Be Less Categorical About Timing of Lift-Off

1 February 2022

By David Barwick – FRANKFURT (Econostream) – Judging by the effort European Central Bank Governing Council members have put into hammering home their views since their last gathering, one might think that the meeting this week stood to yield a particularly significant outcome following a heated debate. While the discussion will probably be spirited, expectations of major results are likely to be dashed.


There are a number of reasons to think that this Thursday will be a stock-taking exercise more than anything else. The Governing Council has not imposed upon itself any sort of timeline for further decisions, Econostream understands, and with macroeconomic projections not slated for updating until March, the ECB is without its usual basis for a policy move.


Moreover, having established in December the pace with which tapering will proceed, the ECB has effectively already answered the most immediate question for now of 2022.


The news, if any, will thus have to emerge from potential shifts in ECB President Christine Lagarde’s view of things as shared at the press conference. Much of the messaging from last time can be perfectly well recycled for this occasion, in addition to which the thoughts she has aired in the last few weeks are bound to resurface.


We suspect the highest potential for interesting comments is in the issue of market rate expectations, which have risen notably not just since December but also in the last few days, fed by the clear failure of inflation in major Eurozone member economies to recede in January as much as had been hoped and expected.


Left to her own devices, Lagarde might prefer to err on the dovish side, lest she wind up inadvertently tightening financing conditions by encouraging speculation about an initial rate hike, which financial markets are increasingly convinced will indeed occur before 2022 has ended.


Unfortunately for her preference, Lagarde may be in something of a bind after having so flagrantly failed on December 16 to convey colleagues’ inflation-related concerns. Her studious omission of these became particularly apparent with the release of the relevant meeting account on January 20, and may now come back to haunt her, all the more as developments in the interim make those concerns look thoroughly legitimate.


In this context, she could feel obliged to reflect the preceding deliberations more faithfully, even if it means sounding a tad more hawkish than she would ideally wish to. That said, we doubt she will have to eat too much crow.


A key point here is that she has already sharpened her language over the last seven weeks. ‘But suffice at this point to indicate that, under the present circumstances, as I have said before, it is very unlikely that we will raise interest rates in the year 2022’, she said at the December 16 press conference. ‘That still stands.’


Whether that still stands now is a question in need of asking, as she has lately avoided being so explicit. In a speech on January 14, the idea that inflation would subside got one perfunctory sentence: ‘We expect the drivers of inflation to ease over the course of this year.’ She put the focus on the ECB’s willingness and ability to ‘respond to a range of circumstances’, and on the deceleration of asset purchases decided the month before.


Interviewed on French television on January 20, Lagarde again did not categorically reject a 2022 lift-off, saying of rate hikes merely that ‘we are not there yet in the Eurozone.’ The ECB was ‘going to start by slowly stopping the purchases of public and private debt at the end of March for the emergency programme ... and when we have finished buying sovereign debt, at that point we will look at interest rates.’


While that obviously doesn’t sound like she is encouraging speculation about 2022, it goes less far in discouraging such talk than she would have gone in December.


In remarks for the World Economic Forum on January 21, Lagarde presented reasons why ‘gradually those inflation numbers will decline’, but again stopped well short of committing the ECB not to hike rates in any particular year and stressed that monetary authorities were without blinders.


‘Now, it doesn’t mean to say that we have to be open to any change to this inflation outlook’, she said. ‘And I’m looking at the numbers that we have since, you know, a month ago. We will be having new projections in a couple of months that might look different, and that point I will have to look at my roadmap.’


This is the sort of language we think Lagarde will want to employ on Thursday: noncommittal, data- and criteria-driven, eyes wide open and with a reference or two to the additional clarity March will hopefully bring.


At the same time, she will likely repeat the narrative of a still-subdued outlook for medium-term inflation – despite the unexpected persistence of high short-term HICP - and note the need for stronger wage growth, yet to be seen, as a precondition for more self-sustaining inflation developments.