ECB Insight: Lagarde Seems to Confirm That Rate Hike Apt to Follow Net Purchases Quickly

11 May 2022

By David Barwick – LJUBLJANA (Econostream) – European Central Bank President Christine Lagarde suggested on Wednesday that the ‘some time after’ of the ECB’s forward guidance needed to be defined with precision, but on balance probably just wanted to emphasise the potential imminence of a rate hike once net asset purchases end.

Speaking at the 30th anniversary conference of Banka Slovenije, Lagarde was by no means dovish, delivering a litany of hawkish arguments in support of a changing medium-term inflation outlook. These included 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.’

For good measure, Russian aggression and the energy transition made it ‘increasingly unlikely that the disinflationary dynamics of the past decade will return’, she said.

Lagarde then reiterated with respect to the ECB’s net asset purchases that her ‘expectation is that they should be concluded early in the third quarter.’

In this respect, she is at least consistent, having been focused on ‘early in the third quarter’ for some weeks now. She leaves stubbornly unclear whether that is the same as a June ending, a possibility Council members are increasingly advocating, but Econostream understands that there is little practical difference, the two options being separated by a matter of days.

As for rates lift-off, she said, the ECB has ‘not yet precisely defined the notion of “some time”. Deliberately so.’

Here, an observer of the ECB might scratch his head in bewilderment. The change in the wording of the ECB’s forward guidance from ‘shortly after’ to ‘some time after’ was intended precisely to avoid the impression of any automaticity about the time lapse between the end of net asset purchases and the first rate hike. There is thus no need to ‘precisely’ define ‘some time after’ - in fact, it would seem to run counter to the purpose of the new phrasing.

Indeed, as she herself then adds, she has ‘been very clear that this could mean a period of only a few weeks’. And she is not the only one; various others including Vice President Luis de Guindos have made clear that ‘some time’ can be quite short, even days.

On balance, we understand all this to be her somewhat inelegant way of confirming that lift-off can follow on the heels of the end of net asset purchases.

‘After the first rate hike, the normalisation process will be gradual’, she continued.

The juxtaposition of this comment and the previous ones is interesting. We are open to the interpretation that Lagarde is suggesting that, as expected by markets, the first rate hike – unlike those thereafter - might NOT be so gradual, meaning as above that it would come soon after the end of net asset purchases.