Lagarde: We continue to see risks to the economy as balanced in the medium-term

Eurozone inflation risks are on the rise but price pressures could still subside before becoming entrenched in expectations, European Central Bank President Christine Lagarde said on Monday.

Pointing to mounting inflation risks, Lagarde opened the door last week to an interest rate hike later in 2022 and said that a March 10 meeting will be crucial in deciding how quickly the bank would wind down its long-running bond buying scheme, a cornerstone of its stimulus efforts.

“We have to bear in mind that demand conditions in the euro area do not show the same signs of overheating that can be observed in other major economies,” Lagarde told the European Parliament’s committee on Economic and Monetary Affairs.

While Lagarde herself did not commit to any decision, several policymakers argued that the first move will be to speed up an exit from the bond buying scheme, which is due to run indefinitely but at least until October.

An interest rate increase could only come thereafter but quicker tapering could mean a raise, the first since 2011, before the end of the year.

Markets now price 50 basis points of rate hikes this year but economists are more cautious, with most predicting the first move either at the end of the year or early 2023.

In the introductory remarks section of her testimony before the EU Parliament on Monday, ECB President Christine Lagarde said “We continue to see the risks to the economic outlook as broadly balanced over the medium-term”.

Key Quotes:

“The current pandemic wave and associated restrictions are likely to continue to have a negative impact on growth at the start of this year.”

“Our commitment to delivering on our inflation mandate remains absolutely unwavering.”

“The economic impact of the current pandemic wave appears to be less damaging to activity than previous ones.”

“Bottlenecks will still persist for some time, but there are signs that they may be starting to ease.”

“Inflation is likely to remain high in the near term.”

“We need more than ever to maintain flexibility and optionality in the conduct of monetary policy.”

“The likelihood is that the current price pressures will subside before becoming entrenched, enabling us to deliver on our 2% target over the medium term.”

“In the past surges in energy prices weakened the spending power of households, and reduced inflation over the medium term.”
Market Reaction

No market reaction to Lagarde’s remarks has appeared yet, which are very much in fitting with the ECB’s usual script, but traders will be keeping an eye out for any information that might come during the Questions & Answers session.