European Central Bank ready to boost stimulus, Lagarde says

Consumers and companies are both proving to be reluctant spenders, ECB president tells European Parliament

European Central Bank president Christine Lagarde said the ECB's current inflation forecast of 1.3% by 2022 - well below its 2% target - is “not satisfactory”. AFP  

The European Central Bank is ready to deploy more monetary stimulus to aid the recovery if needed as the pandemic damps prospects for the economy, according to President Christine Lagarde.

Addressing European lawmakers on Monday, Ms Lagarde called the recovery across the 19-nation euro zone uncertain and incomplete, with consumers cautious to spend and companies reluctant to invest.

“The public health crisis will continue to weigh on economic activity and poses downside risks to the economic outlook,” she said in a video conference with members of the European Parliament’s Economic and Monetary Affairs Committee. The Governing Council “continues to stand ready to adjust all of its instruments, as appropriate”.

Resurgent coronavirus infections are threatening new restrictions, jeopardising the economic progress made since lockdowns earlier this year plunged the region into a deep recession.

Policymakers have started to stake out their positions ahead of a discussion on whether the ECB should add support to nurture the economy. Most economists predict the €1.35 trillion ($1.6tn) emergency bond-buying program will be expanded this year – probably in December when new economic forecasts are published.

“Further stimulus looks likely despite opposition,” ABN Amro’s Nick Kounis, who expects the bond programme to be expanded by €500bn in December, said in a report. “We think that there is a majority of officials who are already starting to come behind this view.”

The ECB said earlier this month that the recovery is in line with its baseline projections. Yet some of the most recent surveys have shown that while manufacturing is still improving, services are shrinking again.

One of the most worrying indicators – noted recently by executive board member Fabio Panetta and Bank of Spain Governor Pablo Hernandez de Cos – is flagging inflation. The annual rate of consumer prices fell below zero in August for the first time in four years.

Ms Lagarde said she’s not overly concerned about “slightly different views and opinions” among her fellow policy makers, stressing she was a consensus-builder and describing some dissent as healthy.

Still, she said the ECB’s current projection that consumer-price growth will average 1.3 per cent in 2022 – well below the goal of just under 2 per cent – is “not satisfactory.”

The inflation rate is expected to remain negative over the coming months. Preliminary data for September is due on Friday.

“The Governing Council will carefully assess all incoming information, including developments in the exchange rate, with regard to its implications for the medium-term inflation outlook,” Ms Lagarde said.

Euro strength, which undermines price growth by cutting import costs, is a challenge for the central bank. Ms Lagarde declined to comment on the specific level of the currency, which has retreated from a two-year high this year, reiterating that it is not a policy target for the ECB.

She repeated, though, that the value of the euro is important for how inflation outlook is going to develop.

“We monitor those movements very closely in order to adjust our measures as a result of inflation projections in short and medium term,” she said.