ECB’s Lagarde Foresees July Policy Shift, 2022 ‘Transition’

Lagarde told investors to prepare for new guidance on monetary stimulus in 10 days.

ECB’s Lagarde Foresees July Policy Shift, 2022 ‘Transition’
Christine Lagarde, president of the European Central Bank (ECB), arrives at a European Leaders (EU) summit in Brussels, Belgium. (Photographer: Valeria Mongelli/Bloomberg)

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European Central Bank President Christine Lagarde told investors to prepare for new guidance on monetary stimulus in 10 days, and signaled that fresh measures might be brought in next year to support the euro-area economy after the current emergency bond program ends.

Speaking to Bloomberg Television days after the ECB raised its inflation goal to 2% and acknowledged it may overshoot the target, Lagarde said the July 22 Governing Council session -- previously expected to be relatively uneventful -- will now have “some interesting variations and changes.”

“It’s going to be an important meeting,” she said on Sunday in Venice, after a meeting of Group of 20 finance ministers and central bankers. “Given the persistence that we need to demonstrate to deliver on our commitment, forward guidance will certainly be revisited.”

ECB’s Lagarde Foresees July Policy Shift, 2022 ‘Transition’

The unexpectedly early conclusion of the ECB’s strategy review last week is immediately feeding into speculation over the central bank’s plans as the euro-zone economy starts to recover from the pandemic. The review also introduced climate-change considerations into policy, and officials said they’ll start taking account of the cost of owner-occupied housing.

Lagarde said she expects the ECB’s current 1.85 trillion-euro ($2.2 trillion) bond-buying plan to run “at least” until March 2022. That could then be followed by a “transition into a new format,” she said, without elaborating.

Still, she dismissed the need to discuss when emergency stimulus might be wound down, saying she’s only “guardedly optimistic” about the recovery because the delta variant of the coronavirus poses a threat to efforts to resume normal life. While inflation will pick up this year, the central bank expects that to be temporary.

“We need to be very flexible and not start creating the anticipation that the exit is in the next few weeks, months,” Lagarde said.

Her Governing Council colleague Francois Villeroy de Galhau, the Bank of France chief, came out with similar sentiment on Sunday, saying policy can be adapted at any monetary meeting and “we have at least four such meetings between now and the end of the year.”

September Meeting

Vice President Luis de Guindos said Monday that the ECB will at least have to change its policy language on interest rates at its meeting next week to reflect the new goal. “I don’t discard that we’ll have some additional changes in the forward guidance, but it’s something we’ll discuss next week,” he said at an Omfif event.

After the summer, the Governing Council will have more information about the impact of the delta variant of the coronavirus, the path of fiscal policy and how the economy is coping with supply-chain bottlenecks, Guindos said, while declining to prejudge what decisions will be taken at the September meeting.

The euro was down 0.2% at $1.1854 at 12:26 p.m. Frankfurt time. Italy’s 10-year bond yield fell as much as four basis points to 0.73%, close to a three-month low, and narrowed the premium over its German peer -- a key gauge of risk in the region -- by two basis points to 104 basis points.

The ECB’s approach sets it apart from some of the world’s biggest central banks. U.S. Federal Reserve officials are already discussing when to start tapering their stimulus program as growth and inflation accelerate.

ECB’s Lagarde Foresees July Policy Shift, 2022 ‘Transition’

A growing chorus of economists also expects the the Bank of England to raise interest rates as early as next year.

The ECB’s 25-member Governing Council agreed in June to continue running emergency bond purchases at an elevated pace this quarter, though the account of the meeting showed diverging views. Some governors have also publicly said they don’t expect the program to be extended past March.

Lagarde said the immediate task is to review the parts of the ECB’s guidance on future interest rates and asset purchases that are tied to the previous inflation goal of “below, but close to, 2%.” The Governing Council chose not to address those changes last week.

“We’re going to look at the circumstances, we’re going to look at what forward guidance we need to revisit, we’re going to look at the calibration of all the tools we are using to make sure that it is aligned with our new strategy,” she said.

She also agreed that the new inflation target “might take a little longer” to reach, but said the more important issue is “the acceptance and the tolerance” that a transitory and moderate inflation overshoot may be needed as part of the commitment to restoring price stability.

“We have to use the tools, and we have a big toolbox, to actually deliver that 2%,” she said. “We have to do it.”

Digital euro, climate change
  • Lagarde delved into climate change and the prospect of a digital euro in the interview. She said the Governing Council will likely agree next week to move to the “exploratory phase” of a central bank digital currency. That will mean a couple of years of work before the decision is taken on whether to implement it.
  • On climate change, Lagarde urged governments to agree to a unified carbon price, and said the central bank expects to buy more green bonds as more are issued. She also noted that the ECB is “not proposing to weigh in any shape or form by reference to climate change” its holdings of sovereign bonds.

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