European Central Bank (ECB) President Christine Lagarde struggled to find a balance between expressing the Governing Council’s concern about record high inflation and justifying the status quo on monetary policy. She refused to say whether the monetary institute would act on its key rates in 2022, as expected by the markets. At the next meeting of the Governing Council on Thursday 10 March, euro area central bankers will have new economic data to take stock of the situation.
“Inflation has risen sharply in recent months and surprised on the upturn again in January”, Lagarde said, referring to the record rates of 5.0 and 5.1% seen in December and January respectively in the eurozone.
Due “mainly” to higher energy costs, which are driving up prices in many sectors, and higher food prices, “inflation is likely to remain high for longer than expected, but it should ease later this year”, she added. She anticipated a “moderation” in energy prices in the medium term and an improvement in global supply chains.
However, Ms Lagarde did not hide the fact that risks to the inflationary outlook were “tilted to the upside, especially in the short term”. “If price pressures result in higher-than-expected wage increases or if the economy returns to full capacity more quickly, inflation could be higher”, she said. On the issue of wages, she expects wages to rise as an “economic logic” of the recovery, although at this stage the ECB does not see any pressure from rising wages on inflation.
In November 2021, the former head of the IMF said that a rise in ECB interest rates in 2022 was highly unlikely (see EUROPE 12825/18).
She has been asked several times whether such a statement still prevails, as the Bank of England has raised rates in the face of inflation close to that seen in the eurozone. Ms Lagarde neither reaffirmed nor denied her remarks, noting in passing that wage pressure in the UK was much stronger than in the Eurozone.
The Governing Council will take stock of the situation in March, on the basis of the new macroeconomic projections available, so as not to rush into decisions.
“As soon as it is necessary, we will act, because it is our duty”, said Ms Lagarde, noting that the primary mission of the EU institution was price stability.
However, any action will be “gradual” and nothing will be done until the ‘PEPP’ operation of massive repurchase of mainly government securities, activated at the outbreak of the pandemic in spring 2020, has been completed next March, as decided by the ECB last December (see EUROPE 12855/8). Furthermore, Ms Lagarde highlighted that any decision related to rates will have to respect the guidelines on the future path of interest rates (‘forward guidance’), and in particular the three cumulative conditions agreed in July 2021 (see EUROPE 12767/16).
On the economic front, the ECB President welcomed the fact that by the end of 2021 wealth production would have returned to its pre-pandemic level and that unemployment would be at its lowest level, at 7% of the working population. “Although infection rates are still very high, the impact of the pandemic on economic life is now less damaging”, she continued, expecting a “strong rebound” in growth in 2022.
However, some uncertainties remain related to the evolution of the pandemic and geopolitical tensions, as Europe is “so dependent” on its energy imports, Ms Lagarde noted.
See ECB monetary policy decisions: https://bit.ly/3LaRJ84 (Original version in French by Mathieu Bion)