ECB Insight: More Ground to Cover, Says Lagarde, But Don’t Ask How Much

4 May 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank delivered more or less as expected on Thursday, opting to slow the pace of its tightening whilst making clear that, given the lack of a clear impact of higher borrowing costs on the real economy, this was not to be understood as the end of the hiking cycle.

As such, President Christine Lagarde was at least nominally hawkish, assuring that despite the ‘variety of views expressed’ at the meeting, ‘everybody agreed that increasing rate was necessary, that, second, we are not pausing – that’s very clear – third, we know that we have more ground to cover…’

Still, her hawkishness was tempered not least by the admission that monetary policy was clearly working on at least one important front.

Whereas six weeks ago, Lagarde had stated that she could do no more than say ‘that we are beginning to see transmission of our monetary policy through the credit channel’, today she readily described past rate hikes as in the process of ‘being transmitted forcefully to euro area financing and monetary conditions’.

The Bank Lending Survey, which Lagarde highlighted as ‘explain[ing], obviously, the decision that we made’, left no doubt that 350bp of previous tightening was having an effect, she said.

‘Is it a sufficient effect yet?’, she asked. ‘We don’t know, because we are not seeing the transmission at this point in time into … the real activity, which then has an impact on prices and then reduces inflation.’

This ‘complete impact’ was still lacking, she said, though she returned at various points to the subject of what impact there was, noting for example that ‘the demand from corporates was really, really down’ in the face of higher interest rates.

At the same time, Lagarde was loath to provide even a qualitative insight into just how much ground was left to cover. Pressed, she could do no better than offer the lame observation that ‘it’s not so much the destination that matters, but the journey. And we are on a journey.’

She was without a ‘magic number’ to approximate the terminal rate, she said. ‘We will know what that is when we get there…’

That being the case, there was something perfunctory about her insistence that all Council members were ‘determined to fight inflation, tame inflation and return it to 2% medium term’ and that they also all felt ‘that the inflation outlook is too high and has been so for too long’.

Such platitudes cost little, and when finally drawn out, Lagarde’s every other word underscored the potentially tenuous nature of the ECB’s commitment to more tightening.

‘What I’m telling you now is, given our baseline, the findings that we have, the data that we can analyse today, our judgment in the room is that we are not pausing – that applies to today’, she said. ‘Based on what we see, we determined that we have more ground to cover. I’m not saying that in the abstract, I’m saying that with reference to the baseline of March, to what we are seeing in development, and I’m here saying we believe that we have more ground to cover.’

This is of course hardly the first time that an explanation by Lagarde leaves observers wondering all the more where precisely things stand. Our best guess - pending other policymakers’ contributions to the discussion - is that the ECB will face considerable opposition to further hikes if the data don’t develop in a way that clearly warrants these, but that the president deemed discretion to be the better part of valour, so that someone else will have to make clear the extent of the Governing Council's tightening fatigue.