ECB Insight: Lagarde Avoids Stoking Expectations, But Makes Little Effort to Dampen Them

8 May 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Saturday steered clear of offering financial markets much new in the way of guidance about the timing with which monetary accommodation would be withdrawn, but neither was she keen to dampen expectations, and her comments on the economy suggested a degree of confidence.

Interviewed by Slovenian national daily Delo, Lagarde said, ‘Judging by the incoming data, my expectation is that net asset purchases should be concluded early in the third quarter.’

This is no more or less than consistent with previous statements. On April 24, Lagarde said about ending net asset purchases that there was a ‘high probability that we do so early in the third quarter’. Two days before, she had also noted a ‘high probability that it will be early rather than late in the quarter’.

Lagarde is thus simply sticking to her messaging of two weeks ago. Fair enough, and yet a bit more clarity would be welcome as the third quarter draws closer. How does the ECB define the point in time at which net asset purchases can be said to end? Is it the first month (week?) in which these purchases reach and remain at zero?

Depending on the ECB’s answer to this question, its final net asset purchases could conceivably take place in June, a possibility we raised as early as March 11, the day after the Governing Council meeting at which the purchases were deemed likely to end in the third quarter. Since then, Executive Board member Isabel Schnabel and Banca d’Italia Governor Ignazio Visco have both suggested that June would in fact be the last month.

On Friday, another Governing Council heavyweight also got behind that idea. Banque de France Governor François Villeroy de Galhau said in a speech, ‘Let me simply stress that seen from today the case for continuing to press the accelerator and adding further net purchases after June is not obvious.’

This is thus the other issue with Lagarde’s comments. With Council members increasingly broaching the idea of a June end to net asset purchases, she might have made clearer where she stands and whether June would be compatible with ‘early in the third quarter’.

Econostream is going to stick to the view that it would be. At this point, we are even inclined to consider a June end probable, though it is not a done deal and in particular we do not rule out a small amount of buying – for what little it would be worth in practical terms – at the beginning of July.

‘Adjustments to the key ECB interest rates will take place some time after the end of net purchases and will be gradual’, Lagarde went on to tell Delo. This is also not terribly helpful, inasmuch as the sentence dates from March 10 and the ECB president – along with other Council members - has used it word-for-word various times.

Still, at least we know what ‘some time after’ means, Lagarde herself having explained on March 10 that the wording is ‘all-encompassing. It can be the week after, but it can be months later…’. The data are what matter for a hike, not how much time has elapsed since net asset purchases ended, she said.

As of Saturday’s interview, Lagarde can thus be considered not to have ruled out a July hike, even if a bit less ambiguity might have been appropriate at this stage.

But what about the data that will drive the decision? Here was Lagarde’s chance to tell a story that would implicitly fill in other gaps, and she appears to have done just that via a macroeconomic assessment that we read as at least not overtly pessimistic.

Yes, Russia’s war against Ukraine is hurting growth and stoking inflation (nothing new there), and yes, the pandemic is also not helping. Having gotten that out of the way first – not in the reverse order, which would have left a somewhat different impression – Lagarde said that economic reopening was providing support, and that 1Q GDP growth was ‘slightly lower’ than 4Q.

Moreover, she declined to rush to judgment as to whether the more severe macroeconomic scenario described by the ECB in March had now materialised, and she stuck to the ECB’s rejection of stagflation.

In short, Lagarde simply did not sound as though she were in the grip of pessimism about the area’s growth prospects and gave no other reason to hope for much relief on the inflation front. The economic gloom and doom spread earlier in the week by her Executive Board colleague Fabio Panetta – who was nevertheless clearly open to policy normalisation – was absent.

All in all, our understanding of Lagarde’s latest comments is that a June (or early July) ending to net purchases followed by a July 21 rate hike remains firmly within the realm of the possible. Beating back such expectations would have sounded different than Lagarde in Saturday’s Delo interview.