Takeaways from Lagarde’s Speech to European Parliament

The President of the European Central Bank (ECB), Christine Lagarde, delivered on Monday a speech to the plenary session of the European Parliament, which is drafting a resolution for the ECB Annual Report.

Lagarde acknowledged that the start of vaccination campaigns provides hope, but noted that people across Europe are still facing the dire social and economic consequences of the Coronavirus pandemic and that the future remains uncertain.

“The start of vaccination campaigns across the euro area provides the eagerly awaited light at the end of the tunnel. At the same time, the renewed surge in COVID-19 cases, the mutations in the virus and the strict containment measures are a significant downside risk to euro area economic activity.”

“2020 will be remembered for the pandemic, which led to an unprecedented economic contraction. The European institutions and the [European Union] EU Member States reacted swiftly, creatively, and resolutely, and the ECB played a vital role.”

The ECB President explained how the central bank’s monetary policy response was centered around two key pillars.

“First, in March 2020 we launched the pandemic emergency purchase programme (PEPP) with an initial envelope of EUR 750 billion. But over the course of the year, incoming data pointed to a more pronounced impact of the pandemic on the euro area economy and a more protracted weakness in inflation than previously envisaged. So the ECB’s Governing Council expanded the PEPP envelope twice, first by EUR 600 billion in June, and then by a further EUR 500 billion in December, for a new total of €1,850 billion.”

The PEPP was tailored as a powerful market backstop to prevent destabilizing financial dynamics and breakdowns in monetary transmission, and an instrument that supports monetary policy stance by smoothing out the impact of the pandemic on the price stability objective, according to Lagarde.

“When containment measures are lifted and uncertainty recedes, we expect the recovery to be supported by favorable financing conditions, expansionary fiscal policies and a recovery in demand.”

Speaking about inflation, Lagarde said that despite the steep increase in January due to a confluence of factors, inflation remains low.

“This can be attributed to weak demand and significant slack in labor and product markets. While we expect headline inflation to increase further over the coming months, underlying price pressures are likely to remain subdued owing to weak demand, low wage pressures and the appreciation of the euro exchange rate.”

The speech then extended to discuss efforts to combat climate change, Lagarde noted that the ECB holds green bonds amounting to 3.5% of its own funds portfolio and that it plans to increase this share over the coming years.

After briefly rising in the early American session, the Euro (EUR) is marginally down against the U.S. Dollar (USD) with the EUR/USD pair trading at 1.2043. The pair has been moving today in a range between 1.2020 and 1.2066, after closing last week at 1.2046 and opening today at 1.2039.