ECB Insight: Lagarde Denies ‘In Any Way Accelerating’ the Normalisation Process

10 March 2022

By David Barwick – FRANKFURT (Econostream) – After only last month finally starting to take upside inflation risks as seriously as many of her European Central Bank Governing Council colleagues had taken them for some time, President Christine Lagarde made it clear on Thursday that, ‘watershed’ event or not, for now Russia’s assault on Ukraine was not going to deter the ECB from pursuing normalisation.

Kind of clear.

Speaking at the press conference following the Governing Council meeting at which, based on the subsequent announcement and the monetary policy statement, it had been decided to accelerate the tapering of QE, Lagarde roundly rejected the idea that an acceleration had in fact been decided.

‘That was not the decision that was made today’, she said. ‘The decision that was made was to progress step by step, to acknowledge the added uncertainty … and therefore to have added optionalities so that in all circumstances we can respond in an agile way.’

‘We are not in any way accelerating’, she insisted. ‘This was in line with our December meeting. This was in line with our February meeting and press conference.’

The ECB’s decision was conditional and date-dependent, and ‘the Governing Council stands ready to revise both in terms of timeline and in volume’, she said.

The ECB was also ‘not talking about tightening’, she explained, but simply normalisation, motivated by the fact that ‘the support that net asset purchase can give to policy rates is getting close to conclusion and therefore requires that we decelerate the rate of purchases …’

The ‘balanced’ outcome was a compromise, Lagarde revealed, between the desires of ‘some members who thought that given the uncertainty … we should be uncertain as well and do nothing’ and those of ‘other members who thought that despite the uncertainty we should move ahead and not have any optionalities.’

According to Lagarde, the ECB’s central scenario despite Russian military aggression was that ‘the economy should continue to rebound thanks to the declining impact of the pandemic and the prospect of solid domestic demand and strong labour markets.’

The updated GDP forecasts of 3.7% this year (-0.5 point versus December), 2.8% in 2023 (-0.1 point) and 1.6% in 2024 (unchanged) indicated an implicit expectation that the impact of the Eastern European geopolitical crisis on growth would not prove protracted.

The inflation outlook underwent more substantial revision, though here, too, the ECB was apparenbtly somewhat optimistic at the forecast horizon, with the new projections calling for euro area HICP of 5.1% in 2022 (+1.9 points versus December), 2.1% in 2023 (+0.3 point) and 1.9% in 2024 (+0.1 point).

Risks to inflation were ‘clearly’ on the upside in the short term and perhaps – though not necessarily - also in the medium term, Lagarde said, mindful of the dampening effect on growth of the energy supply shock.

As had been widely speculated in the run-up to the meeting, the ECB removed the downward bias from its forward guidance on interest rates as well as the words ‘shortly before’ from the sentence about the relative timing of an end to net APP purchases and rates lift-off, with the latter now stating that ‘[a]ny adjustments to the key ECB interest rates will take place some time after the end of our net purchases under the APP…’

‘Clearly, “some time after” is all-encompassing’, Lagarde elaborated. ‘It can be the week after, but it can be months later.’ Another solution would have risked appearing ‘too time-dependent…we want to be data-dependent’, she said. ‘So, whenever the data confirms that the medium-term inflation outlook is at target, then the decision should be made…we’re not guided by a time element…’

Lagarde described the uncertainty of the current environment as ‘maximum’ and ‘huge’, asserting that ‘things can go in all sorts of directions.’

If they don’t, however, or at least not in what would generally be regarded as a negative sense, it is apparent that despite Lagarde’s rejection today of the notion that the ECB has accelerated tapering, European monetary authorities will remain determined to withdraw a level of accommodation that has simply become inconsistent with the macroeconomic setting and their mandate.

Should Russia’s war of aggression against its peaceful neighbour die down reasonably quickly, there is every reason to believe that the ECB would yet more wholeheartedly pursue the normalisation process, and that Lagarde would then have no issue characterising it as such. At the moment, the pace at which this occurs seems destined to be determined by Russian dictator Vladimir Putin.