ECB’s Lagarde Repeats Net Purchases Should End Early in 3Q, Promises Gradual Normalisation

11 May 2022

By David Barwick – LJUBLJANA (Econostream) – European Central Bank President Christine Lagarde on Wednesday reiterated the view that the ECB’s net asset purchases should end early in 3Q, with a first rate hike to follow an indeterminate amount of time thereafter and normalisation to then proceed gradually.

Speaking at the 30th anniversary conference of Banka Slovenije, Lagarde said that ‘the medium-term inflation outlook is changing’, with core measures of inflation ‘nearly all above 2%’, expectations at or above 2% and the ECB’s own forecasts ‘increasingly pointing towards inflation being on target over the medium term.’

Between the impact of Russian military aggression and the need for climate security, ‘it looks increasingly unlikely that the disinflationary dynamics of the past decade will return’, she said. ‘As a result, it is appropriate for policy to return to more normal settings.’

However, the economy of the euro area is not running hot, and the war is hindering growth just as it stokes inflation, she said.

The Governing Council’s decisions last month incorporate the need for optionality, gradualism and flexibility in monetary policy, she said, ‘while also providing a clearly defined sequence of events for the normalisation process.’

‘First, we will end net purchases under the asset purchase programme’, she said. ‘Judging by the incoming data, my expectation is that they should be concluded early in the third quarter.’

As for rates lift-off, she said, the ECB has ‘not yet precisely defined the notion of “some time”. Deliberately so. But I have been very clear that this could mean a period of only a few weeks. After the first rate hike, the normalisation process will be gradual.’

'And I’m deliberately using the term normalisation and not tightening', she added, suggesting that she would explore this theme in greater depth in Sintra.