Wednesday, July 6

Lagarde promises “flexibility where necessary and whenever necessary” to avoid a debt crisis

Christine Lagarde does not give details. But she does make promises. The president of the European Central Bank has spoken this Monday in the European Parliament’s Economy Commission, where she has been questioned by MEPs of all colors about the timeliness of the latest decisions taken, mainly the announcement of a rise in interest rates. But, also, it has been challenged by the new instrument that it announced last week to contain the risk premiums of the most exposed countries -those of the south- and avoid a debt crisis in places like Greece, Spain, Italy and Portugal, for example.

Lagarde has insisted that she is “normalizing monetary policy”, abandoning “asset purchases” to use “interest rates”. And all this to try to stabilize prices around 2%, through the rise of 0.25% in July and at least as much in September. “We have to be aware of what is happening in the economy”, Lagarde acknowledged about the possibilities of an economic fall due to the change in monetary policy: “Recession does not enter into our forecasts”.

“In June we decided to take further steps to normalize our monetary policy,” Lagarde said: “Eurozone activity is being held back by energy costs, uncertainty and supplies. In services, some growth is seen due to the suspension of the pandemic restrictions and good tourist prospects. A labor market with more employment will support income and consumption. The deterioration of energy costs and the great uncertainty form an adverse picture. While prices have increased because there are bottlenecks due to demand from the service sector as the economy reopens.

Lagarde also confirmed: “Wages have started to increase, we expect an increase in negotiated wages in 2022 and then more above projections due to tight labor markets, the increase in minimum wages and inflation. We are going to adjust monetary policy based on inflation. The pandemic has left vulnerabilities in the euro zone.

The President of the ECB explained that on June 15 it was decided “to apply more flexibility in reinvestments in the PEPP [programa pandémico de compra de activos] in order to maintain the role of monetary policy in the transmission mechanism for the price stability mandate. And we have decided to complete all the instruments against market fragmentation. Russia’s aggression in Ukraine is affecting the euro zone. We are in a moment of uncertainty. Budget policy is what will allow us to adapt to these consequences, in addition to the NGEU and REPowerEU”.

“We are experiencing a sequence of events,” Lagarde acknowledged: “We decided that we were going to stop net asset purchases, which ends on July 1, because there would be a sequence: end purchases and raise interest rates. We want to increase rates by 0.25%. It is the beginning, a step along the way. As a third component, it was said that if medium-term inflation persists or deteriorates, we would like to have another tool. Beyond September, we will gradually and appropriately increase rates. This is at the core of the mandate, to ensure price stability. Our duty is to apply the instruments with the necessary flexibility against this risk of fragmentation”.

The President of the ECB explained: “Since the progressive normalization began in 2021, the ECB’s governing council has urged to fight against the risks of fragmentation, and at the meeting I convened last week it decided to apply flexibility at the time to reinvest in the portfolio, because the pandemic has exposed vulnerabilities. In order to improve our toolbox, we commissioned the completion of this plan for consideration by the governing council. It is tempting to ask what kind of bracket, differential, measures, criteria, frameworks… But I am not going to answer them, I understand that it is a question on the minds of many, but work is ongoing, suffice it to say that fragmentation will be addressed if that risk arises, and with the appropriate instruments, and flexibility, in an effective measure, proportionate and within our mandate, and whoever hesitates, makes a mistake”.

Lagarde has acknowledged that the ECB is “the first central bank to open an internal investigation into what led to the failure of the inflation projections. It is not temporary or transitory, and we are investigating. Our projections failed on energy impact and bottlenecks. We have stopped buying assets, we use the interest rate, we are flexible where it is needed and whenever it is needed. We will see the balance later.”




www.eldiario.es

Leave a Reply

Your email address will not be published.