Lagarde urges patience at ECB despite ‘painful’ high inflation
Christine Lagarde has said that the European Central Bank should remain “patient” and avoid premature policy tightening, even though the eurozone’s soaring inflation is “unwelcome and painful”, especially for the poorer.
“At a time when purchasing power is being squeezed by higher energy and fuel bills, excessive tightening would represent a windfall,” the ECB President said in a speech to a Frankfurt banking conference. justifiable for recovery”.
“We shouldn’t rush to tighten too soon in the face of supply-driven or passing inflationary shocks,” said Lagarde, adding that the ECB is likely to maintain a substantial stimulus measure in the region. meeting next month even if other central banks withdraw support.
Lagarde’s remarks knocked the euro off course, pushing it down 0.7% against the dollar to trade at $1.284, close to a 16-month low. The euro also lost ground against other major currencies including the pound and the yen. Against the Swiss franc, it hit a six-year low of 1,048 francs.
The common currency has depreciated over the past week on expectations of a widening interest rate gap between the euro area and other major economies, as central banks such as the US Federal Reserve and the Bank of The UK central bank reacted to the recent rise in inflation with more tightening of policy.
Eurozone government bonds rise on ECB policy outlook to be accommodative for longer and further boosted by news on new restrictions of Germany and Austria are being deployed to prevent the spread of Covid-19. Yields on German 10-year government bonds, a benchmark for assets across the eurozone, fell 0.04 percentage points to minus 0.32%, their lowest level in two months.
“It is understandable that markets are fearful of Covid-related disruptions and the possible impact on growth,” said Lee Hardman, a currency analyst at MUFG. “That certainly helps Lagarde’s efforts to push back against expectations of an early ECB rate hike.”
Last month, inflation in the euro area reached the highest level in 13 years 4.1%, well above the ECB’s 2% target, led some investors to bet that the ECB would raise rates next year. However, Lagarde said many of the causes of higher inflation, such as soaring energy prices and supply chain bottlenecks, are “likely to fade in the medium term”.
“This inflation is unwelcome and painful – and of course there are concerns about how long it will last,” she added. “We take those concerns very seriously and monitor developments carefully.”
Lagarde said the eurozone economy has faced a “mix of shocks, partly related to catching up demand but also having strong supply-driven factors”. “Policy tightening too soon will only make the squeeze on household incomes worse.
“At the same time, it will not address the root causes of inflation, as globally established energy prices and supply bottlenecks cannot be remedied by ECB monetary policy,” she added. .
Most investors expect the ECB to announce next month that its flagship 1.85 billion euro bond-buying program, which it launched last year in response to the pandemic, will end. ends in March 2022. However, the central bank is expected to step in at the same time to establish its longstanding asset-buying program to limit the sell-off in the bond market.
Having pledged not to raise rates before halting primary bond purchases, next month’s decision will provide an important signal about the potential timing of the first rate hike.
Lagarde said the ECB is likely to continue to buy bonds for much of next year, saying: “Even after the emergency is expected to end, the important thing remains for monetary policy – including including appropriate adjustments to asset purchases – to support a sustained recovery and return inflation to our target of 2%.
“We don’t see the conditions – at the economy-wide level or the sector level – for inflation to be above our target to be self-sustaining,” she said, before concluding: Monetary policy today therefore must be patient and persistent, while at the same time alert to any destabilizing dynamics that may emerge. ”