Lagarde warns against early tightening of stimulus efforts


Christine Lagarde has warned governments and central banks not to respond to early signs of an economic recovery from the coronavirus crisis in the coming months by cutting stimulus too quickly, even if inflation begins to rise. 

The European Central Bank president said on Wednesday that there was likely to be a rebound in economic activity this year driven by “expected pent-up demand” as the pandemic is brought under control — but that would not be enough to justify a tightening of monetary policy.

“Any kind of tightening at the moment would be very unwarranted,” Ms Lagarde said at a Reuters online event. “We cannot rely on the expected pent-up demand, which might lead to some additional movement on the inflation front for instance . . . to tighten as far as monetary policy is concerned.”

Too precipitate a tightening of policy could lead to “very serious risks”, she added.

The pandemic has caused a sharp increase in household savings and reduced demand for many services, such as holidays, restaurants and cinemas. This has added to the downward pressure on prices caused by lower energy costs and value added tax cuts in Germany and other countries, dragging the headline eurozone rate of inflation into negative territory in the final few months of last year.

However, Ms Lagarde said that “we shouldn’t write off inflation” and cited “movements in other countries” including the US, China and Japan, that showed upward pressure on prices before the pandemic hit.

Another downward pressure on prices in the eurozone is the recent appreciation of the euro, which last month hit its highest level against the US dollar for almost three years, lowering the price of imports and making exports more expensive.

Ms Lagarde said the ECB would “continue to be extremely attentive to the impact on prices that exchange rates have”. 

The ECB expects the rate of price growth to move back into positive territory in the coming months; its latest forecast is for headline consumer price inflation in the eurozone to reach 1 per cent this year and 1.4 per cent by 2023, although this would still be well below its target of just under 2 per cent.

Last month, the ECB expanded its main stimulus policy by increasing the size of an emergency bond-buying programme by €500bn to €1.85tn, while cutting its economic forecasts in response to the pandemic’s resurgence across Europe.

Ms Lagarde said on Wednesday that despite the further upsurge in cases and restrictions on activity since those forecasts were made, the ECB’s expectation that the eurozone economy would grow 3.9 per cent this year was still “very clearly plausible”. The central bank had already accounted for the likelihood that lockdowns would be extended into this year when it made the forecast, she said.

However, she warned it would be “a concern” if lockdowns were extended beyond March, or if the “laborious” start to vaccinations continued with more delays beyond then.

Economists worry that new strains of coronavirus that are proving to be more infectious could also prove more resistant to vaccines and delay the easing of restrictions on people’s travel and social activity.

Joe Biden’s inauguration next week as US president has boosted investors’ hopes of fresh economic stimulus this year, pushing up yields on US Treasuries. Economists said this could have a knock-on effect on eurozone bond yields, challenging the ECB’s aim to keep eurozone government borrowing costs extremely low.

“We suspect that the ECB’s readiness to act in ways consistent with controlling monetary spillovers from the US will be tested as the year advances and stronger commitments may need to be forthcoming,” said Krishna Guha, vice-chairman at Evercore ISI.


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