Lagarde’s monetary policy since the corona quarantine

Dhe European Central Bank still leaves the calendar for rate hikes open: ECB President Christine Lagarde announced after the April meeting of the ECB Council that net bond purchases by the central bank should end in the third trimester. So far this has been worded a little more loosely. “Sometime after” rate hikes should follow. That could mean a week or months later, Lagarde said. However, she confirmed that she was heading towards a normalization of monetary policy.

Press conference despite corona disease

The President of the ECB suffers from Corona and is in quarantine. Nevertheless, she held the press conference as planned, as an online conference from her home office in Frankfurt. As a precaution, the vice-president of the ECB, Luis de Guindos, stood ready to intervene if his voice were to fail, as Lagarde herself announced.

The ECB President stressed that Russia’s attack on Ukraine, a “humanitarian catastrophe”, had also changed some things economically. “The war is already weighing on business and consumer confidence, including with the uncertainty it brings,” Lagarde said. Trade disruptions have led to further material shortages. Rising energy and commodity prices weighed on demand and hampered production: “Downside risks to the growth outlook have increased significantly due to the war in Ukraine. The ECB President said inflationary pressures were building. Inflation in the euro zone recently stood at 7.5%.

Lagarde therefore stressed that the ECB was driving on sight. “Flexibility”, “optionality” and “graduality” are three of the terms used by the central bank for not yet wanting to commit very precisely to monetary policy – and reserves the right to different options and a cautious approach.

Normalization order must be preserved

The latest economic data suggests it could end net asset purchases in the third quarter, Lagarde said. She explained that the exact time to stop buying could be at the start or end of the third quarter. The central bank is thus keeping open an interest rate hike in the second half of the year. Lagarde stressed that the ECB intended to stick to the planned sequence for the normalization of monetary policy: “The sequence we have agreed on is: first to complete the purchases net of assets and some time after to decide on the rate hike and subsequent rate hikes.”

Lagarde was rather cautious about central bank considerations to develop new monetary policy instruments to act against an excessive rise in bond yields in some eurozone countries. Last week, agencies reported that the ECB was working on suitable instruments. Lagarde, however, remained vague. She said the central bank had noticed with the PEPP crisis program how important flexibility was to avoid fragmentation, i.e. the break-up of the eurozone. She also wants to continue to focus on flexibility.

Situation in America another

Lagarde pointed out that the situation in the euro zone cannot be compared to that of America. “It would be like comparing apples and oranges,” the ECB president said. The US Federal Reserve has already raised its key rate by 0.25 percentage points and the ECB is still hesitating. “The situation in the United States differs in many respects, including the evolution of unemployment and wages,” Lagarde said. Wages in America have risen much faster than in this country. The effects of the war in Ukraine are of course stronger on the euro zone than on the United States.

The Association of Savings Banks and economists are criticizing the ECB’s adherence to its zero interest rate policy in the face of record inflation. “Inflation in the euro area is at unprecedented highs, and the ECB must put a stop to it,” said the chairman of the German Savings Banks and Money Transfers Association, Helmut Schleweis, after the decision on the interest rate. “As resolutely as central bankers have repelled the threat of deflation in recent years, they must now pursue a more restrictive monetary policy against inflation in the euro zone with lucidity and determination.” , the greater the risk of a chain reaction of rising prices and rising wage demands. The Center for European Economic Research (ZEW) has a similar assessment. “Every month of procrastination damages the reputation of this important European institution,” said ZEW economist Friedrich Heinemann. Federal Finance Minister Christian Lindner was also critical: “It is the mandate of the ECB to ensure price stability. The ECB cannot ensure economic growth,” he said: “Inflation is the greatest threat to public finances and long-term prosperity.

The Dax rises, the euro gives way

Germany’s Dax stock index widened its price gains somewhat after the interest rate decision. In the afternoon, the main German index rose 0.5% to 14,151 points. Because there was no unexpected acceleration in monetary policy tightening, stock investors stepped in again, according to the trade. Meanwhile, the euro continued to lose ground. The common currency fell 0.6% to $1.0823. After all, the central bank is leaving the door open for an interest rate hike – but that hasn’t fueled hopes for a quicker approach.

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