ECB Insight: Lagarde Walks Back Last Week’s Hawkishness

8 February 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde appeared on Monday to want to take at least some of the hawkish edge off her performance last Thursday.

Speaking at a hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Lagarde repeatedly made comments that, without flatly contradicting her remarks of last week, were distinctly more consistent with a cautious approach to the withdrawal of accommodation and with guarded optimism about the inflation outlook.

Told right at the outset of the Q&A by a sceptical member of EU Parliament that the ECB’s stance didn’t duly reflect the heightened awareness of unexpectedly persistent inflation, Lagarde didn’t take the opportunity to assure her questioner of the contrary with anything like the forcefulness on display last week.

Rather, after simply noting that the ECB had confirmed December’s decisions, its forward guidance and the expected policy sequencing, she then reported Thursday’s outcome with respect to inflation in mostly matter-of-fact terms of what she had said, as if in the role of a neutral observer and without doubling down on the key messages that had constituted a shift in the eyes of ECB watchers.

‘At the same time, since December, we have received new data that we needed to acknowledge in our communication’, she said. ‘That’s what I did on Thursday. So just like last Thursday, I acknowledged that inflation has risen sharply in recent months and it has further surprised on the upside in January. … And I also said … that inflation is likely to remain high in the near term.’

Though her questioner had implicitly encouraged her to reinforce the idea of alarm over inflation, Lagarde went in the opposite direction, observing that ‘[w]e are not subject to excess demand, we are not subject to labour market overheat[ing] as are some other jurisdictions such as the US or the UK. And survey- and market-based measures of expectations have stabilised around our 2% target.’

‘So the chances have increased – have increased - that inflation will stabilise at our target’, she added. ‘But there are no signals that inflation will be persistently and significantly above our target over the medium term, which would require a measurable tightening.’

The Governing Council at its March 10 meeting will ‘[l]ook very carefully at the staff projection numbers and what they will tell us’, she said. ‘But there is no need to rush to any premature conclusion at this point in time, and the outlook is way too uncertain for that. What we need to do at this point is to increase optionality going forward by clearly signalling that we will continue to be data-dependent in line with our forward guidance and our mandate of price stability.’

The takeaways intended by Lagarde are self-evident: yes, inflation seems likely to stay higher for longer than anticipated, but there is no reason to think that this will give rise to a self-sustaining dynamic and thus no grounds to expect a vigorous reaction from the ECB, especially not so soon.

Lagarde returned to the idea, already brought up in her opening remarks, that high energy prices could on balance actually weaken inflation prospects.

‘One [possible effect] is it can push prices up and tilt it to the upside, and that’s what we are seeing, particularly in the near term’, she said. ‘But it can also have a dampening effect on consumption and on investment, because it squeezes the income that is available, and as a result … would have a downside impact on both growth and inflation.’

The ECB needs to analyse this ‘two-fold impact’ to properly assess the medium-term outlook, she said. ‘And that’s what we will be doing in the next monetary policy Governing Council meetings, when we have projections. The first one will be in March and will give us a chance to assess the sustainability of those inflation push that we are seeing.’

‘But for the moment, let me remind you, that we are not seeing any de-anchoring of inflation expectations to the upside’, she added. ‘We are seeing a degree of re-anchoring, if you will.’

That Lagarde chose the plural and referred to coming Council meetings rather than just the March 10 gathering can be seen as another indication that she is keen to apply the brakes to the speculation her performance last week encouraged and rein in expectations of ECB action .

If the hawks on the Council thought that Lagarde had finally come around to the realisation that the ECB was in danger of falling behind the curve, her remarks on Monday may come as a disappointment to them and in any case may set the stage for the struggle to normalise monetary policy to continue.