ECB Insight: Lagarde Waiting to See What Next Week Brings

25 February 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Friday declined to speculate as to the ultimate economic impact on the euro area of Russian dictator Vladimir Putin’s aggression against Ukraine (transcript of her remarks here), but noted that there would be opposing effects while also suggesting that price and financial stability would ultimately decide the course of monetary policy.

At a press conference following the informal meeting of EU finance and economy ministers and central bank governors, Lagarde said that ‘the ECB is closely monitoring the evolving situation’ and ‘will conduct a comprehensive assessment of the economic outlook’ preparatory to the Council’s monetary policy meeting in two weeks.

Although ‘premature to assess exactly the economic impact of the current conflict’, Lagarde saw energy prices and confidence as the chief channels by which any impact would be felt. She noted that gas prices were six times and oil prices 54% higher than a year ago.

There was no point in guessing at what the next set of forecasts would be, she said, given the evolving situation, but the short-term impact of Russian aggression would be inflationary.

‘Persistent uncertainty, though, will probably be a drag on consumption and investment and will impede growth’, she added. ‘And given the current uncertainty that I have mentioned, it is more than ever critically important to be guided by the two principles of optionality and flexibility.’

Optionality was needed ‘to adjust to the changing circumstances, and flexibility in order to have full capacity to respond to this times of crisis’, she said.

Though naturally queried directly as to the possibility that policy normalisation would have to go slower in the wake of Putin’s ongoing war crimes, Lagarde stuck to her guns in declining to speculate. ‘I’m sorry to disappoint you, but the response to your question would be entirely premature and inappropriate’, she said.

Still, she stressed the unique role of the ECB’s mandate in determining the path monetary policy would take.

Geopolitical developments ‘clearly will have a bearing, but we are driven by our mandate, which is price stability and financial stability, and we will make those decisions comes the next monetary policy meeting and then subsequently in June, September and December’, she said. ‘That will be the case, I can assure you, on the basis of data and the good judgment of the Governing Council.’

More short-term inflation and the need to ensure price stability on the one hand, ‘persistent’ uncertainty that would hamper economic growth on the other. Understandably enough, Lagarde is unsure what the future will bring. It is imaginable that already in one week, much about the current situation will have changed, so that from today’s perspective it would indeed be folly for her to be too committal in any direction.

We thus think that with a whole two weeks until decisions become necessary – if even just a decision not to make any other decisions – waiting to see what comes makes sense. And that is what Lagarde is doing.