FRANKFURT, Feb 3 – The European Central Bank kept policy unchanged as expected on Thursday, staying on track to provide copious stimulus this year even as inflation runs at a record high, exceeding both the bank’s 2% target and its projections.
Following are highlights of ECB President Christine Lagarde’s comments at a news conference after the policy meeting.
“I think we should be a little bit cautious about what I am hearing a lot, which is constant comparisons between the U.S. and the euro-area, the Fed and the ECB.
“We are really operating in different environments with different economic data. Just to give you an example, our demand here in the euro-area is pretty much back to where it was pre-COVID, in the U.S. it is 30% up. Ask yourself why? Because of this massive fiscal stimulus that the U.S. economy has had, unlike the euro area, where it has been more moderate, not excessive and which is producing the measured pace at which some factors are significantly improving.”
“We are not seeing any such development and while yields have moved up, spreads have not widened in any significant manner. We very much look into these matters very carefully. We have no reason to believe that it is going to be different. If it was, we are obviously going to respond, and we have all the tools, all the instruments and the adequate flexibility if it is justified.”
“Clearly what will happen in the next few weeks and what we can see, both for our March meeting and then later on our June meeting will be critically important to determine whether the three criterias of our forward guidance are fully satisfied.”
UPSIDERISKS TO INFLATION
“In the recent past, we have not actually mentioned, we have not included in our monetary policy statement, the characterisations of risk in relation to inflation. So I think that is a very explicit indication that it might very well be significantly higher than what we had expected over the course of the year and possibly higher than we had anticipated at the end of the year. So risk is to the upside in particular in the near term.”
“The geopolitical clouds that we have over Europe, if they were to materialise would certainly have an impact on energy prices and through energy prices and increased cost throughout the whole structure of prices.
“But it would also impact growth as a result of reduced income and possibly as a result of reduced consumption and deferred investment.
“So the pure economic impact would certainly be significant than what we are seeing at the moment.”
“I’m very sorry to say but we do assess risk to the upside for the near term, particularly for the near term. We will know better what impact it will have on the medium-term inflation but let me just say one thing, we are getting much closer to target and this is so because in the medium term there are factors, drivers of inflation that are helping us, finally reach, hopefully, that target and that has to do with the labour market, that has to do with the broad-based inflation that we have, which concerns more than 60% of the items and it has to do with the inflation expectations.”
“Come March, when we have additional data, when we have been able to integrate in our analytical work the numbers that we have received in the last few days, we will be in a position to make a thorough assessment again on the basis of data.”
“It all goes back to how do we make our decisions? We make them on the basis of data, we make them on the basis of the forward guidance when it comes to interest rates we make them gradually because we are not here to rock the boat if I may say. We are going to use all instruments, all optionalities in order to respond to the situation but the situation has indeed changed.”
“The situation has indeed changed. You will notice in the monetary policy statement I have just read we do refer to upside risk to inflation in our projection. So the situation having changed, we need to continue to monitor it carefully, we need to assess on the basis of the data and then we will have to take a judgement.”
“We don’t just take projections at face value, and this is particularly relevant in the current circumstances given the level of uncertainty, given the geopolitical risks around.
“There has to be an element of judgement and that actually belongs to the table of the Governing Council.”
ASKED IF 2022 HIKESTILLUNLIKELY
“You know, I never make pledges without conditionalities and it is even more important at the moment to be very attentive to that. So as I said, we will assess very carefully; we will be data-dependent. We will do that work in March.”
“The UK has a history of much higher inflation than we have in the euro area.
“The critical difference now has to do with the labour market, where clearly there is a lot of pressure on wages where there is scarcity of workers for jobs that are available.
“I don’t want to take a political stand but there was a lot of non-UK labour force that eventually had to leave the UK (after Brexit) that has not been totally replaced and the shortage of workers is actually having a bearing on … the labour market in the UK.
“So that’s really what is causing the significant difference between the two.”
NO RUSH TO A DECISION
“There was a determination not to rush into a decision.”
“With the upside surprise that we have seen first in December, second in January, there was unanimous concern around the table of the Governing Council about inflation numbers and obviously the impact that it has in the near term and on our compatriots in Europe.”
“Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term.
“If price pressures feed through into higher-than-anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher.”
“We continue to see the risks to the economic outlook as broadly balanced over the medium term.”
“Most measures of underlying inflation have risen over recent months, although the role of temporary pandemic factors means that the persistence of these increases remains uncertain.”
“Price rises have become more widespread, with the prices of a large number of goods and services having increased markedly.”
BOTTLENECKSSTARTING TO EASE
“Shortages of equipment, materials, and labour in some sectors continue to hamper the production of manufactured goods, delay construction, and hold back the recovery in parts of the services sector. There are signs that these bottlenecks may be starting to ease, but they will still persist for some time.”
“High energy costs are reducing the purchasing power of households and the earnings of businesses, which constrains consumption and investment.”
“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 stabilizes at its 2% target over the medium term.”
“Shortages of materials, equipment, and labour continue to hold back output in some industries. High energy costs are hurting incomes and are likely to dampen spending.”
“The economy is affected less and less by each wave of the pandemic and the factors restraining production and consumption should gradually ease, allowing the economy to pick up again strongly in the course of the year.”
“The euro area economy is continuing to recover and the labour market is improving further, helped by ample policy support.”
“Growth is likely to remain subdued in the first quarter as the current pandemic wave is still weighing on economic activity.”