Lagarde warns of early tightening of stimulus efforts

Christine Lagarde has warned governments and central banks not to respond to the first signs of an economic recovery from the coronavirus crisis in the coming months by cutting stimulus too quickly, even if inflation begins to rise.

The European Central Bank president said on Wednesday that there would likely be a rebound in economic activity this year due to “expected pent-up demand” as the pandemic is brought under control – but that would not be enough to justify a tightening monetary. Politics.

“Any kind of tightening at the moment would be very unwarranted,” Lagarde said during a Reuters online event. “We cannot rely on the expected pent-up demand, which could lead to further movement on the inflation front for example. . . to tighten monetary policy. “

To rush a policy tightening too much could lead to “very serious risks,” she added.

The pandemic has caused a sharp increase in household savings and reduced demand for many services, such as vacations, restaurants and cinemas. This has added to the downward pressure on prices caused by falling energy costs and value-added tax cuts in Germany and other countries, driving the overall inflation rate of the eurozone into negative territory in the last few months of last year.

However, Ms Lagarde said that “we should not cancel inflation” and cited “movements in other countries” including the United States, China and Japan, which have shown upward pressure. on prices before the pandemic hits.

Another downward pressure on prices in the euro area is the recent appreciation of the euro, which last month reached its highest level against the US dollar in nearly three years, lowering the price of imports and making exports more expensive.

Ms Lagarde said the ECB “will continue to be extremely attentive to the price impact of exchange rates”.

The ECB expects the rate of price growth to return to positive territory in the coming months; his latest forecast is that headline consumer price inflation in the eurozone will hit 1 percent this year and 1.4 percent by 2023, even though that would remain well below its target of just under by 2 percent.

Last month, the ECB extended its main stimulus policy by increasing the size of a € 500 billion emergency bond purchase program to € 1.85 billion, while reducing its forecast economic response to the resurgence of the pandemic in Europe.

Ms Lagarde said on Wednesday that despite the further upsurge in cases and activity restrictions since those forecasts, the ECB’s expectation that the eurozone economy would grow 3.9% this year was still “Very clearly plausible”. The central bank had already factored in the likelihood that lockdowns would be extended this year when it made the forecast, she said.

However, she warned it would be “a concern” if lockdowns were extended beyond March, or if the “laborious” start of vaccinations continued with more delays beyond.

Economists fear that new strains of coronavirus that prove to be more infectious could also prove to be more resistant to vaccines and delay the easing of restrictions on people’s travel and social activities.

Joe Biden’s inauguration next week as US president has boosted investors’ hopes for further economic recovery this year, pushing up yields on US Treasuries. Economists have said this could have a ripple effect on euro area bond yields, questioning the ECB’s goal of keeping borrowing costs for euro area governments extremely low.

“We suspect that the will of the ECB to act in a manner consistent with the control of the monetary fallout from the United States will be tested as the year progresses and that stronger commitments may need to be made. to be to come, ”said Krishna Guha, vice president of Evercore ISI.

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