ECB’s Lagarde set to flag continued stimulus as crisis rages
Central bank chief set to signal ECB is a long way from scaling back bond-buying
When she was growing up in Le Havre, Christine Lagarde joined France’s synchronised swimming team, which she later described as “a sport of resistance and endurance” that taught her how to “grit your teeth and smile”.
The European Central Bank president may need those skills when she unveils the central bank’s latest monetary policy decision on Thursday and tries to explain why, despite a nascent economic recovery, it is still too early to seek an exit from its emergency bond-buying programme.
Having ramped up its monetary stimulus dramatically in response to the disruption of the coronavirus pandemic, Ms Lagarde signalled in a video interview with the Financial Times last week that the ECB is now set to pause and take stock before any fresh action.
“Through the impact of the massive programmes that we put in place, the situation has calmed down enormously,” the ECB president told the FT, adding: “We have done so much that we have quite a bit of time to assess [the economic data] carefully.”
At its last monetary policy meeting in early June, the ECB expanded the amount of bonds and other assets it plans to buy under its Pandemic Emergency Purchase Programme from €750bn to €1.35tn and extended its timespan until at least the end of 2022.
Since then, the outlook for the eurozone economy has become slightly less apocalyptic. Consumers went on a spending spree after shops reopened in May, helping retail sales across the region make up much of the ground lost with record falls in March and April, while industrial output also recovered, albeit at a slower rate.
This has prompted some senior policymakers — including ECB executive director Isabel Schnabel and Dutch central bank governor Klaas Knot — to say it may not need to spend the entire €1.35tn put aside for its emergency bond-buying programme after all.
Calls for the ECB to wind down its main crisis-fighting tool earlier than expected could intensify if EU leaders reach agreement on a proposed €750bn recovery fund to support countries hit hardest by the pandemic at a summit later this week.
Yet Ms Lagarde is likely to keep stressing that a deal on the EU recovery fund is far from certain this year and the economy is still a long way from making a full recovery.
The eurozone has so far avoided a big surge in bankruptcies or job losses. But that is only thanks to massive government support as well as monetary stimulus by the ECB. There are big questions about how long taxpayer support will last and what will happen after it ends.
“For now, the ECB can afford to wait and see,” said Florian Hense, economist at Berenberg. “Better that the ECB overdoes it a little now and pull back at a later date than do too little and run the risk that the recovery could fizzle out.”
Crucially, inflation remains much closer to zero than to the ECB’s core target of just under 2 per cent. So Ms Lagarde is likely to grit her teeth and smile as she explains why the ECB is still a long way from declaring the crisis over and scaling back its bond-buying.