ECB Insight: Lagarde Treads Carefully, But Renews Stress on Continued Normalisation

14 April 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Thursday took care not to show much bias in any direction, but as in March, the message came though nonetheless that Russia’s campaign of aggression against Ukraine was not standing in the way of the ECB's monetary policy normalisation.

Speaking at the press conference following a Governing Council meeting at which the ECB exceeded last month’s decisions only to the extent of confirming that net asset purchases under the APP should end in 3Q, Lagarde quickly drew attention to this outcome, noting the corresponding sentence of the decision statement.

‘At today’s meeting we judged that the incoming data since our last meeting reinforce our expectation that net asset purchases under our asset purchase programme (APP) should be concluded in the third quarter’, she reiterated.

This was based on a ‘much stronger affirmation of our assessment of the data…which have indeed changed since five weeks ago’, she said. Lagarde noted that the ‘very likely conclusion’ of net purchases in 3Q had been agreed ‘without being more specific, but being open-minded as to when in the quarter that is. It could be early, it could be late. The third quarter has three months.’

The exact date would be influenced heavily by the ECB’s next set of staff forecasts, she indicated, but the direction of travel was unmistakeable. ‘So we are really very much in a normalisation process and we are continuing on the path of that normalisation process’, she said.

It was evident as well that Lagarde has grown more comfortable with the idea of increased borrowing costs. In reaffirming the ECB’s preferred sequencing of policy withdrawal, she said that the central bank would ‘complete net asset purchases first and some time after that decide interest rate hike and subsequent hikes’, thus subtly seeming to concede that one hike would not be the end of it.

She subsequently opened the door even more widely to a series of hikes rather than a one-off move in asserting that the end of net purchases ‘will then trigger, some time after the end of the net purchases, interest rate hikes.’

That sentence is also somewhat interesting by virtue of her reference to a ‘trigger’, given that colleagues of hers such as ECB Vice President Luis de Guindos and Banque de France Governor François Villeroy de Galhau have portrayed the new wording precisely as a rejection of automaticity.

Lift-off, Lagarde reminded all the same today, could come ‘any time between a week and several months’ after net asset purchases had ended, harking back to her March explanation of what ‘some time after’ meant in the ECB’s forward guidance. At the time, we note all the same, she had chosen the more open-ended ‘months’ rather than today’s more limited ‘several months’.

‘And that stands and remains true’, she said. ‘So we’ll deal with interest rates when we get there.’

As Econostream had reported on Tuesday would be the case, Lagarde rejected a question on quantitative tightening, affirming that this was ‘something that comes clearly at a later stage of our journey and we are not there yet’, so that the Council had not discussed it.

Similarly, she declined to discuss the French elections and was predictably reticent about any new programmes, limiting herself to a reiteration of how important it was to ‘make sure that our monetary policy stance is transmitted throughout the entire area’ and of the ECB’s ability to come up with whatever it required in timely fashion.

‘If necessary, we move promptly’, she said. The ECB ‘will design whatever additional instrument is appropriate in order to deliver the flexibility that we believe is useful.’

Wage developments remained ‘relatively muted’, she said, much as in March, but she sounded a tick more concerned about the potential for that to cease to be the case in an environment of persistently high inflation.

Similarly, she was mildly less optimistic about inflation expectations than five weeks ago. ‘While various measures of longer-term inflation expectations derived from financial markets and from expert surveys largely stand at around 2%, initial signs of above-target revisions in those measures warrant close monitoring’, she said.

The ‘last thing’ the ECB wants ‘is to see inflation expectations at risk of de-anchoring', she said.

While financial markets may have harboured visions, destined to be disappointed, of a more stridently hawkish outcome, the fact is that for a central bank whose buzzwords remain gradualism, optionality and flexibility, the renewed, unmistakeable commitment to normalisation under the current circumstances and in a month always supposed to be barren of major decisions is hardly the most dovish outcome.