Bond market under observation: Lagarde: inflation is just a "slip"

Thursday March 18, 2021

Bond market under observation
Lagarde: inflation is just a "slip up"

The ECB remains indifferent to the rise in consumer prices in the euro area. Short-term fluctuations are no reason to do anything, emphasizes central bank chief Lagarde. The ECB is on the alert as bond yields rise. "Depending on market conditions", additional bond purchases should be made "flexibly".

The European central bank is sticking to its course: The European Central Bank (ECB) will not react to short-term swings in inflation, as central bank chief Christine Lagarde explained in the economic and currency committee of the EU parliament.

The ECB expects the rate of inflation to rise this year, but from its point of view this will be primarily shaped by temporary factors. The ECB had already announced that it would "look through" this development. "We're not going to focus on slip-ups, unsustainable moves, and I think we need to warn each other that inflation numbers will rise over the course of 2021," Lagarde said.

"We must not confuse the forest with the trees. A short-term inflation movement linked to temporary factors … should not trigger a specific movement, on the contrary," Lagarde said. This is not a race to catch up. "We are trying … to prevent returns from being one step ahead of economic development."

In February, as in January, consumer prices rose by 0.9 percent. Previously, they had even fallen for several months in a row in the wake of the pandemic. Experts expect that annual inflation will continue to rise in the next few months.

The trillion dollar US stimulus package for the economy probably provided moderate impetus for growth in Europe, Lagarde said. At the same time, she pointed out that it is crucial for the recovery of the economy in Europe that the EU's own aid package, which was decided in 2020, is implemented. The governments of the EU countries still have until the end of April to submit their project plans to the EU Commission on how they want to use money from the agreed 750 billion euro reconstruction fund.

Increase in bond purchases: "If necessary, we will do something"

In the case of the ECB's bond purchases, the decided higher pace will probably only be reflected in the data over time, according to Lagarde. Weekly data on purchases would continue to be skewed by factors such as bond repayments, she said. "The increase in the speed of our program will become apparent when it is viewed over long periods of time."

The ECB decided at its interest rate meeting last week to significantly increase the speed of its bond purchases as part of its PEPP pandemic program. In doing so, she wants to counteract an undesirable tightening of financing conditions for companies, states and households. Because since the beginning of the year, government bond yields had risen sharply. Banks, for example, use the yields as an orientation when setting their credit terms.

"The purchases will be implemented flexibly depending on market conditions," she told the MEPs. The ECB Council will discuss the appropriateness of bond purchases under the PEPP pandemic purchase program at its six-week monetary policy deliberations. "Of course, every six weeks when we have our monetary policy council, we measure these parameters in order to make an assessment – financing conditions, inflation outlook," said Lagarde at the hearing of the European Parliament's Economic and Monetary Affairs Committee and added: "If necessary, we will do something."

In February, the Euro-Wächter acquired papers with a volume of almost 60 billion euros as part of the PEPP program. Analysts expect that the monthly volumes will now clearly go up.