ECB’s Lagarde: No Hike Until Net Asset Buys Done; High Energy Prices Could Dampen Inflation Outlook

7 February 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will stick to its forward guidance and not hike interest rates before net asset purchases have come to an end, ECB President Christine Lagarde said Monday.

In remarks at a hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Lagarde insisted on the defined sequence for a withdrawal of monetary accommodation and that the ECB would act gradually.

History indicated that more expensive energy was more likely on balance to have a negative economic impact and thus weaken inflation prospects, she said.

She reiterated with no change from last Thursday that the ECB ‘will continue reducing the pace of our asset purchases step by step over the coming quarters, and will end net purchases under the pandemic emergency purchase programme at the end of March’, and that ‘[i]n view of the current uncertainty, we need more than ever to maintain flexibility and optionality in the conduct of monetary policy.’

Monetary policy is data-driven, especially now, and what incoming data reveal about medium-term inflation prospects would be ‘key parameters in our forward guidance’, she said.

Lagarde noted with respect to forward guidance the ‘defined sequencing between the end of our net asset purchases and the lift-off date’, and stated flatly that ‘[a] rate hike will not occur before our net asset purchases finish.’

As well, she made clear that the conditions of forward guidance would need to be fulfilled for the ECB to feel ‘sufficiently confident that a tilt in our policy rate is appropriate.’ She highlighted the importance of the conditions ‘as safeguards against a premature increase in interest rates.’

‘Finally, any adjustment to our policy will be gradual’, she added.

The ECB would be better able to understand unexpectedly high inflation the last two months on the basis of the next staff projections, she said. Energy prices could on the one hand be boosting production costs and leading to higher wages, but on the other might also depress incomes and earnings, ‘thereby reducing economic activity and dampening the inflation outlook’, she said.

Past experience suggests that the Eurozone is more susceptible to the latter effect, she said.

‘Obviously, in our assessment of the inflation outlook, we have to bear in mind that demand conditions in the euro area do not show the same signs of overheating that can be observed in other major economies’, she said. ‘This increases the likelihood that the current price pressures will subside before becoming entrenched, enabling us to deliver on our 2% target over the medium term.’

‘Indeed, while moving up over recent months, indicators of longer-term inflation expectations are consistent with this expectation’, she said. That inflation expectations are solidly anchored is ‘reassuring’, she said.

The latest wave of the pandemic would dampen near-term growth, as would supply constraints and more expensive energy, she said. On the other hand, the current pandemic wave’s impact was less severe economically than that of preceding waves, she noted, so that the economy will be able ‘to pick up strongly again later this year.’

Short-term inflation would remain elevated, she said, and financing conditions are still favourable.

Lagarde repeated the risk assessment of last Thursday.

‘To sum up, the euro area economy has continued to recover, although growth is expected to remain subdued in the first quarter. While the outlook for inflation is uncertain, it is likely to remain elevated for longer than previously expected, but to decline in the course of this year.’