ECB’s Lagarde: ‘There Are Clearly Conditions in Which Gradualism Would Not Be Appropriate’

28 June 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Tuesday made clear that the ECB could under circumstances abandon the principle of gradualism that it has been preaching for many months.

Speaking at the ECB Forum on Central Banking 2022, Lagarde, referring to her blog post of last month, said that ‘the appropriate monetary policy stance has to incorporate our principles of gradualism and optionality’, where gradualism meant that authorities could evaluate how their policies affect inflation prospects and optionality allowed them to ‘if uncertainty decreases, re-optimise the policy path as necessary.’

‘Indeed, there are clearly conditions in which gradualism would not be appropriate’, she said. ‘If, for example, we were to see higher inflation threatening to de-anchor inflation expectations, or signs of a more permanent loss of economic potential that limits resource availability, we would need to withdraw accommodation more promptly to stamp out the risk of a self-fulfilling spiral.’

Still, Lagarde for now only reconfirmed the intention to hike rates by 25 basis points in July and by potentially more in September, if the inflation outlook were not to show improvement.

‘This commitment is, however, data dependent’, she continued. ‘This conditional approach to the pace of interest rate adjustment should not be confused with delaying normalisation.’

The clarity of the ECB’s reaction function means expectations and risk-free rates can adjust before the ECB actually moves, she said, pointing to the €STR forward rate ten years out and other measures.

In addition to flexibly reinvesting maturing assets acquired under the pandemic emergency purchase programme, the ECB has accelerated work on a new anti-fragmentation instrument, she reminded.

‘The new instrument will have to be effective, while being proportionate and containing sufficient safeguards to preserve the impetus of Member States towards a sound fiscal policy’, she said.

‘Preserving policy transmission throughout the euro area will allow rates to rise as far as necessary’, she said. ‘In this sense, there is no trade-off between launching this new tool and adopting the necessary policy stance to stabilise inflation at our target. In fact, one enables the other.’