ECB recognizes inflation will remain elevated but will not raise interest rates

Following today’s meeting of the European Central Bank’s (ECB) Governing Council, ECB President Christine Lagarde announced that the euro area economy is continuing to recover and the labour market is improving further, helped by ‘ample policy support’. The ECB has decided not to raise interest rates despite inflationary pressure. 

In more measured tones Lagarde said that growth was likely to remain subdued in the first quarter, as the current pandemic wave is still weighing on economic activity. Shortages in labour, high energy costs and supply chain blockages are holding back output in some industries.

Inflation has risen sharply in recent months and is now expected to remain elevated for longer than previously expected, but to decline in the course of this year.

“The Governing Council therefore confirmed the decisions taken at its monetary policy meeting last December, we will continue reducing the pace of our asset purchases step by step over the coming quarters, and will end net purchases under the pandemic emergency purchase programme (PEPP) at the end of March. In view of the current uncertainty, we need more than ever to maintain flexibility and optionality in the conduct of monetary policy. The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term.”

Asked about a proposal published by advisors of the Italian and French governments on the Stability and Growth Pact, including a proposal to transfer part of the ECB balance sheet to a European agency in order to give ECB more space for monetary policy, Lagarde said that she had read the piece. 

“We also have taken a view within the Governing Council of the European Central Bank concerning fiscal deficits and the Growth and Stability Pact, because we have an interest in how fiscal rules will be applied, we have an interest in the governance of the euro area and we are very keen to see as much of a fiscal union as is possible given that we have a monetary union, and that the current crisis has demonstrated amply that when monetary and fiscal policy work in synchronization, it can be a very efficient, but I'm not going to pass judgement on a proposal,” said Lagarde.

“We would like to see rules that are simpler, that are more user friendly, that provide for countercyclical response, but the decision will ultimately depend on what the leaders are prepared to accept. From our perspective, the more fiscal union there is, obviously the better for monetary policy.”

Asked why the Bank of England had raised rates, Lagarde pointed to the UK’s labour shortages as a key contributory factor, while not directly attributing this problem to Brexit.

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