Lagarde’s determination to provide the euro-area economy with plenty of monetary stimulus
European Central Bank (ECB) President Christine Lagarde has renewed a pledge to deliver faster stimulus, even as bank officials acknowledged for the first time since 2018 that the euro-zone economy is no longer overshadowed by risks to its growth outlook.
“A sustained rise in market rates could translate into a tightening of wider financing conditions,” Bloomberg quoted Lagarde as saying today, explaining why ECB officials committed to keep asset purchases at a “significantly higher” pace than in the first months of the year. She further explained that, “such a tightening would be premature and would pose a risk to the ongoing economic recovery”.
Bloomberg reports that Lagarde and her ECB colleagues are confident in their cautious approach with an improved outlook on growth for this year and next, along with their first assessment of “broadly balanced” risks for the euro region since December 2018, when Mario Draghi was leading the institution.
Contrasting views on the pace of ECB bond buying
Those contrasting perspectives may reflect a compromise among officials that underscores the ECB’s determination to entrench a rebound, while accommodating a rapidly shifting outlook as economies reopen.
Lagarde confirmed that there were “a couple of diverging views” on how fast to keep buying bonds, adding that it’s still “too early” to discuss when the emergency programme should end.
Rishi Mishra, analyst at Futures First, weighed in on the contending views, noting that, “characterising the risks as being ‘broadly balanced’ while maintaining a higher pace of purchase is a clear win for the doves”.
Mishra argued that, “the only saving grace for the hawks is the prospect of a reduction in pace in September”.
“On the one hand, an even stronger recovery could be predicated on brighter prospects for global demand and a faster-than-anticipated reduction in household savings once social and travel restrictions have been lifted,” Lagarde said.
She added that, “on the other hand, the ongoing pandemic, including the spread of virus mutations and its implications for economic and financial conditions continue to be sources of downside risk”.
Accelerating the pace of bond buying
ECB policy makers accelerated the pace of their €1.85 trillion (US$2.25 trillion) bond-buying programme three months ago to rein in rising borrowing costs and several argued before the meeting that the economy isn’t ready for a withdrawal of support, setting the scene for a repeat pledge. Purchases have been conducted at a pace of roughly €19 billion a week since March, up from €14 billion earlier in the year.
Today’s decision on the pace of the stimulus suggests the ECB is likely to continue at or close to that higher clip until the recovery firms. Bloomberg say most economists don’t expect a reduction until September.
While Lagarde also unveiled forecasts that showed faster growth and inflation both this year and next, she insisted that price pressures in the economy “remain subdued.” The ECB’s decision was paired with a more optimistic outlook for growth in 2021 and 2022.
Policy makers both in the euro zone and in the U.S. argue that prices are being driven by temporary factors including higher fuel costs and manufacturing bottlenecks that will be resolved before too long. In the euro area, inflation climbed to 2% in May, technically above the ECB’s target.
The ECBs last forecasts, however, showed it missing its goal both next year and in 2023. As Lagarde started speaking, the U.S. published figures showing inflation there jumped to 5% in May, stoking concerns that price gains might become entrenched.
The Federal Reserve says it expects them to be temporary.