ECB’s Lagarde Says Rising Market Interest Rates ‘Undesirable’

Sustained increase in market interest rates could derail the Eurozone economy‘s recovery from the coronavirus pandemic-induced slump, European Central Bank President Christine Lagarde said Thursday as the bank decided to accelerate its bond purchases over the next quarter.

“Market interest rates have increased since the start of the year, which poses a risk to wider financing conditions,” Lagarde said in her introductory statement to the post-decision press conference.

“If sizeable and persistent, increases in these market interest rates, when left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy,” she added.

This is “undesirable” as preserving favorable financing conditions still remains necessary to reduce uncertainty and bolster confidence to support the economic recovery and inflation outlook, Lagarde said.

Earlier on Thursday, the ECB Governing Council decided to step up the pace of its emergency bond purchases over the next quarter based on market conditions and left its key interest rates unchanged.

The size of the pandemic emergency purchase program, or PEPP, was left unchanged at EUR 1,850 billion, but the bank said the bond purchases under the scheme over the next quarter would be conducted at a significantly higher pace than during the first months of this year.

Speaking to the press, Lagarde said the decision to accelerate bond purchases were taken in total consensus in the Governing Council and that it was convenient to decide on the pace on a quarterly basis.

She also said it was undecided as to what “significantly higher pace” meant and that a big PEPP increase cannot be expected next Monday.

Preserving favorable financing conditions over pandemic period remains essential, the ECB chief said.

Policymakers will continue to monitor developments in exchange rate for impact on the inflation outlook and the bank will see through temporary increases in inflation, she said.

The ongoing vaccination campaigns, together with the envisaged gradual relaxation of containment measures, underpin the expectation of a firm rebound in economic activity in the course of 2021, Lagarde said.

However, the vaccine roll-out in Europe has been slower and marred with controversy in some instances. The fiscal stimulus is also lower compared to the huge $1.9 trillion boost announced in the U.S.

The ECB unveiled its latest staff macroeconomic projections. The euro area growth forecast for this year was raised to 4.0 percent from 3.9 percent.
The projection for next year was cut to 4.1 percent from 4.2 percent. The outlook for 2023 was retained at 2.1 percent.

Real GDP is likely to contract again in the first quarter of the year due to persistence of the pandemic and the associated containment measures, the bank said.

The risks surrounding the euro area growth outlook over the medium term have become more balanced, although downside risks, mainly from the virus mutations, remain in the near term, Lagarde said.

The bank expects underlying price pressures to rise somewhat this year due to supply constraints and an improvement in domestic demand, yet remain subdued.

The ECB Staff raised the inflation forecast for this year to 1.5 percent from 1.0 percent. The outlook for next year was lifted to 1.2 percent from 1.1 percent. The projection for 2023 was retained at 1.4 percent.

The inflation forecasts for this year and next were raised largely due to temporary factors and higher energy price inflation.

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