ECB’s Lagarde: Work Still to Be Done, but This Can Take the Form of Holding Rates Steady

14 December 2023

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Thursday said that the ECB should not lower its guard on inflation and that holding on to current interest rate levels could be the form of the work still to be done in restoring price stability.

During the press conference following the Governing Council’s meeting leaving interest rates unchanged for the second time in a row and ending reinvestments under the Pandemic Emergency Purchase Programme (PEPP) by end-2024, Lagarde said that ‘we don’t think it is time to lower our guard and we believe that there is still work to be done and that can very much take the form of holding.’

‘Who wants to hang on [to high interest rates] for too long?’, she asked rhetorically after a question regarding the comments of U.S. Federal Reserve Chair Jerome Powell about the risks of keeping interest rates high for too long.

Cuts in interest rates were not debated in the meeting, she said. ‘We did not discuss rate cuts at all. No discussion, no debate on this issue. Between hike and cut there is a whole plateau, whole beach of hold’, she said.

The ECB would continue to follow its data-dependent approach, she said, and needed more data ‘to understand better what happens there and why is domestic inflation resisting’.

‘Some data, and a combination of data and the mechanics between those two, wages and profit, in particular, are going to play a significant role and we’re going to be particularly attentive to those’, she said.

The decision about stopping reinvestments under PEPP at the end of 2024 was shared by a large majority, she said.

‘This is really balance sheet normalisation. It’s a good moment to do that, we have little by way of fragmentation’, she said. ‘Markets have absorbed our decline in APP reinvestments as we have done it in a very similar fashion.’

Asked whether the reduction of PEPP reinvestments on the second half of 2024 could coincide with a reduction of interest rates, she said that ‘[r]ates are the primary tool and we’re going to use that independently of what happens on the PEPP side.’

‘We believe that PEPP has served its purpose. It was intended for the pandemic, it was an emergency programme… The pandemic is over, the WHO has declared so. The emergency is no longer around’, she said.