European Central Bank President Christine Lagarde and board member Fabio Panetta urged patience before tightening the ECB’s ultra-easy policy. This is as the euro zone economy emerges from a slump caused by the pandemic. The price pressures steadily building, from higher energy prices to supply bottlenecks. And so, the euro zone borrowing costs have risen recently. Because the investors are bringing forward their expectations on interest rate hike. But Lagarde and Panetta stressed the ECB should not jump the gun.
Lagarde told an ECB conference that the key challenge is to ensure that they do not overreact to transitory supply shocks that have no bearing on the medium term. Also, she told the ECB Forum on Central Banking, that they will only react to improvements in headline inflation that they are confident are durable and reflected in underlying inflation dynamics. They see no signs that this increase in inflation is becoming broad-based across the economy. Later Panetta added that the ECB should support aggregate demand, avoiding premature actions that could drive up bankruptcies. Overnight index swaps price in a 10-basis=point rate hike.
Inflation could rise as high as 4%. But Lagarde argued that price growth will then quickly sink back below the bank‘s target. She said the fact that, inflation can move moderately above target for a transitory period allows them to be patient about tightening policy until they are certain that such improvement is sustained. They still need an accommodative monetary policy stance to exit the pandemic safely and bring inflation sustainably back to 2%. Adding to her case for patience, wage growth remains muted and unemployment is not expected to fall below its pre-crisis level until the second quarter of 2023. A big policy move is still expected. This is when the bank is likely to decide to end a 1.85 trillion-euro pandemic emergency stimulus scheme.