ECB Insight: Lagarde Sees a Changed Situation; Policy Move in March Not Excluded

3 February 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde’s performance at the press conference on Thursday suggested that she is finally taking her Governing Council colleagues’ inflation fears with the commensurate degree of seriousness and that she regards the situation as having changed in a way that could conceivably lead to a policy move as soon as March.

That a change in tone was in the offing was hinted at by the monetary policy statement already, which included the admission that ‘risks to the inflation outlook are tilted to the upside, particularly in the near term.’

For Lagarde, that was a first, as she had continued to skirt making such a concession long after it had become apparent that it would have constituted nothing more than a statement of fact. For comparison, in December she had been willing to go no further than to say that ‘[t]here is possibly an upside risk, but…’.

That she now sees upside inflation risks ‘particularly in the near term’ makes the avowal all the more dramatic, as she did not – or perhaps was pressed by the Council not to – take the easy way out and concede only short-run risks that have become obvious to the point of undeniability. 'Particularly', after all, implies 'not only'.

On the contrary, her unaccustomed hawkishness permeated nearly every aspect of the occasion. ‘Concerning inflation, with the upside surprise that we have seen first in December, second in January, I can tell you that there was unanimous concern around the table of the Governing Council about inflation numbers’, she said at the outset of the Q&A. ‘I can assure you that that concern was across the board and around the table in equal numbers.’

It almost stretches the imagination to believe that the concern was truly unanimous. Bank of Greece Governor Yannis Stournaras said only ten days ago that ‘[w]hen the pandemic goes away - which it seems to be going away - those barriers will be removed, so inflation will start to fall from the middle of this year’, while Chief Economist Philip Lane said nine days ago that ‘we do expect it to fall quite a bit later this year … and then to be below 2% in 2023 and 2024.’

On the other hand, some of the most extreme doves on the Council – namely Banca d’Italia Governor Ignazio Visco and Executive Board member Fabio Panetta – have been conspicuously silent lately, suggesting that even for that corner, the odds of regretting complacency about elevated inflation have deteriorated to the point of becoming intolerable.

It is also easy to believe that Lagarde’s downplaying of high inflation in December backfired on her at this Council meeting. Having been so demonstrably wrong in minimising concerns seven weeks ago, she would have been under that much more pressure today to abandon an attitude that entailed a risk of letting the ECB fall behind the curve.

Lagarde took the first opportunity that presented itself to draw attention to the significance of March, when new staff forecasts will indicate the latest view of medium-term inflation prospects. To be sure, she also remembered to dampen expectations of anything sudden, saying that ‘we are all concerned to take the right steps at the right time … not to rush into decision unless we had proper and thorough assessment based on data and the analytical work that will take place in the next few weeks.’

However, it would be a mistake to read this to be referring to an indefinite future. In fact, it would seem to point rather specifically to March, and if anything to be an appeasement of those who wonder why the wait until then for concrete action. It is certainly far removed from her earlier rejections of anything 'premature'.

As expected, the issue of market rate expectations was also at the fore very early in the Q&A. Here – apparently aware that her credibility might be at stake - she first sought to account for her previous insistence that a rate hike was ‘highly unlikely’ in 2022 by claiming to ‘never make pledges without conditionalities’.

That might have logically simply laid the groundwork for a repetition of her familiar dismissal of a 2022 lift-off, replete with a careful recount of the conditions for such a lift-off to occur, but the February Lagarde was at pains to put more distance between herself and the December Lagarde.

‘As I said, we will assess very carefully, we will be data-dependent, we will do that work in March’, she said. Forward guidance continued to govern the ECB’s approach, she made clear, the agreed policy withdrawal sequencing would not be tampered with and gradualism ruled.

Pressed for a bit more clarity on her current stance regarding an initial rate hike this year, Lagarde reiterated her supposed practice not to ‘make pledged without conditionalities.’ In December, she continued by way of justification, she had been speaking on the basis of the ECB’s assessment of available data, ‘and it was, as all pledges of that nature, conditional.’

Continuing with another reference to the clarity March would hopefully bring, Lagarde then got to what might be considered a key point. ‘But the situation has indeed changed’, she said, adding that the monetary policy statement was now explicit about upside inflation risks.

‘So, the situation having changed, we need to continue to monitor it very carefully, we need to assess the situation on the basis of the data’, she said. ‘And then we will have to take a judgment.’

All roads lead to March 10 now. While the five weeks until then offer plenty of time for monetary authorities to keep up the recent deluge of commentary and indicate what a next step might look like, developments on the inflation front and the policy responses of other major central banks seem unlikely to argue in favour of standing pat.