MIL-OSI Economics: Interview with CNBC

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Source: European Central Bank

Interview with Christine Lagarde, President of the ECB, conducted by Annette Weisbach, CNBC, on 23 September

24 September 2021

Let me first ask you about your first two years, because it’s almost two years that you are now at the helm of the institution, so what have been the most challenging moments in that time?

It has been very different from what I had expected in the first place. I wasn’t expecting a walk in the park, but I was expecting something more quiet than what we had. The first thing that really hit our radar screen was the COVID crisis, where one country after the other locked down, stopped its activity, and where we had to respond extremely fast. Then I had certain issues with some national court that wanted to challenge the validity of what had been done. And I had initially planned on starting a strategy review, which had not taken place in the last 17 years, at the Central Bank. We started it, we suspended it; we started it again and now we have completed that. So altogether it’s been a very, very busy couple of years, with massive engagement to support the economic activity in spite of this terrible pandemic that came to hit all of us.

It doesn’t stop because what we are witnessing today is inflation picking up a lot faster than previously expected, supply chains being disrupted across the planet. What’s your assessment here: do you think that we’re seeing inflation actually being stickier than when your last round of forecasts was conducted?

That we will see when we have the data and the numbers, because we are really data-dependent. We try to assess the situation based on figures, on data, on facts. We don’t like to operate on the basis of hearsay, assumption here, price increases there. What is true, though, is that we have been revising upward many of our projections in the last three quarters. Things have picked up faster – and that is true for growth, that is true for inflation and that is true for employment. So, in a way, it’s a package of good news because it means that our economies are responding, jobs are being created again. The service activities, which were completely down for so long, are now coming back in full swing. So all that is good, but of course it induces frictions and those bottlenecks of those supply chains that have been disrupted because of the pandemic, and where reinitiating the machine is taking time.

In the main, all of that – we hope – will last when it comes to growth so that activity continues. We hope it will last when it comes to jobs so that employment continues and unemployment goes down, and for prices we think that there will be a return to much more stability in the year to come because many of the causes of higher prices are temporary. When you look at what’s causing it, a lot of it has to do with energy prices. You look back a year ago, prices were rock bottom. They have of course moved up and the difference is explaining a lot of the inflation that unfortunately people are experiencing at the moment. The same goes for some VAT impact, where VAT was reduced in order to stimulate activity. Particularly in Germany, now VAT is back. So that’s another base effect, if you will, that explains the price levels that we are seeing now.

It seems that for the first time in many, many years the so-called slack in the euro area is actually reducing, meaning that wages are also on the rise because there are not enough people to fill the open positions. Is that something you are monitoring or acknowledging as well?

Oh yes, we’re paying great and close attention to this issue of slack, and there is still quite a lot of slack in terms of employment. We still have at least one million more people unemployed today than pre-pandemic. So there is still a lot of ground to cover for employment to return to the pre-pandemic levels. We hope it will happen and as we close that gap, clearly the economic activity will continue to be stimulated and we will see movement on the inflation front.

Is that also the reason why during the last press conference you didn’t want to say that this is tapering, what you have decided – because in a way it is, because you’re reducing stimulus! What is tapering?

I said the lady is not for tapering!

Exactly!

The lady is for calibrating, because this has been our policy: our monetary policy is intended to procure favourable financing conditions. Why is that? Because we want to support the economic players – whether it’s households, whether it’s enterprises, large corporates, sovereigns – all of them need to have favourable financing conditions to cross that bridge towards the post-pandemic stage. And to make sure that there are favourable financing conditions, we look at the whole chain of financing. We look at the inflation outlook and we determine how much monetary support is needed, and that helps us calibrate the purchases that we believe are necessary – which is why we calibrated and decided to purchase moderately in the coming quarter.

You said you were planning on purchasing moderately: what does it mean in numbers? Does it mean 60, 70 or is there more flexibility to it?

There is flexibility to the pandemic emergency programme. That is one of the landmarks of the PEPP, as we call it, the pandemic emergency purchase programme. Because we want to adjust, we want to have the ability to really operate as close to variations as possible to make sure that financing conditions remain favourable. So it works both ways: if we see that less purchases will still procure those favourable financing conditions, we will purchase less; if we see that more is needed, we will add to the purchases.

The Financial Times has run a story based on a call between German economists and your Chief Economist that soon after the projection horizon, inflation will hit 2%, and they had the conclusion from that that a rate hike could be on the cards already by 2023. So why is that wrong, in your opinion? You have defended that conclusion.

It is not at all our conclusion – and anybody is free to draw their own conclusions on the basis of hearsay, second-hand information, quick look at this or that. What I know for a fact, because I know my Chief Economist and my colleague and friend, Philip Lane, is that he never would have said something like what was alleged to have been said. Now, of course he would say, and I would say, that if we continue having a good monetary policy in the future, at some stage we must hit the 2% mark. Because that’s our job; price stability is defined under our new strategy review by reference to the 2% inflation mark, which is identified over a period of time – because we are not going to respond abruptly, we are not going to trust one number. But of course we believe that if our monetary policy is successful, we will indeed hit the 2% inflation. Of course.

But my understanding of your forward guidance always was that it needs to be 2% over the whole projection horizon and only after that you would think about hiking rates. Is that correct?

No, it’s not over the whole projection horizon; what we say is that we want to see inflation at that 2% level, say, midway during the projection period, and lasting all the way to the end of our horizon. We also want to make sure that as we speak, so at the time when we look at the economic situation, the underlying factors give us sufficient confidence that we will reach that for the medium term.

Let’s talk also about the economic outlook because we are seeing at least for Germany but also for other countries, downgrades to the economic outlook, currently also because of the bottlenecks but also because of the higher net energy prices, which are clearly a drag on companies’ performance. How concerned are you that you actually need to revise your growth outlook downward?

We work on the basis of facts, figures, numbers and then we do the best job we can to project. At the moment, we have been revising our projection upward rather than downward and the numbers that we are seeing at the moment lead us to believe that we are still in line with our projections. We will have new projections in December so we’ll see at that time, but for the moment we are in synch and in line with our projection.

Coming back to inflation and the energy prices, because what we’re seeing with the gas price currently happening is unprecedented, what is your assessment here? Do you think these kinds of imbalances in certain markets will be something which we will be witnessing more often?

You know, we’re coming from a situation which was unprecedented, where everything stopped, and we are in this phase where everything is being reset, if you will. It’s inevitable that in those circumstances there are bottlenecks. There is a shortage of supply relative to much higher demand. There is an adjustment period that is taking place at the moment. Typically what we’ve seen in previous circumstances, previous crises, previous supply shortages, bottlenecks, is that it is resolved over the course of time. When you cannot get your spare parts from a particular source, you try to identify another source. Remember some of those very serious damages to supply chains, for instance when there were tsunamis or very dramatic incidents in Japan, in particular. Everybody thought that it would be damaged and disrupted for the next 12 months. Well, in a matter of three months the supplies were identified, new supply chains were put in place.

Things will fall into place as new sources of supply will be identified. Energy is going to be a matter that will probably stay with us longer because we are transitioning as well from fossil-industry-driven sources of energy to what we aspire to be much less fossil sources. So that’s a transition that is in play.

Yes, I remember I think I’ve asked you once whether you think this transition into a CO2-free world will have deflationary or rather inflationary aspects or forces. At the time, you said it’s not clear yet, but is it clearer now?

My fear is that it’s not much more clear today. We are beginning to see some studies and academics are looking into it, and I think the jury is still out. My hunch from having read some of those is that it’s likely to be pushing prices up for a short period of time, and probably later on might have some deflationary impact. But it’s very, very premature and early days to say.

Yesterday the Fed had an all-important meeting and it’s clear that they are now on the trajectory of exiting their extraordinary measures. How much of a time lag do you think there is between the ECB and the Fed?

I have no idea! We are operating with different programmes. There is an element of tapering in the way they have structured their support package to the economy, whereas we are not in that situation. We are in the process of calibrating, and we have begun calibrating. Because this is the fact for October, November, December based on the latest decision that we made, but it’s calibrating. It’s making sure that we are procuring those favourable financing conditions and purchasing what is needed in order to provide that. The Fed is doing something slightly different and I don’t know whether they’re doing it. My colleague and friend, Mr Powell, just said that November might be the time – but it’s fact-dependent again.

He also was saying that he thinks that the Evergrande problematic or market turbulence is purely a Chinese problem. Do you think that as well, because it clearly has spillover effects on the debt markets? For now it’s only Chinese, but the markets are very global.

You know, we are looking at it, we are monitoring it and I had a briefing earlier on today because I think that all financial markets are interconnected. I have very vivid memories of the latest stock market developments in China that had a bearing across the world. But in Europe and in the euro area in particular, direct exposure would be limited.

Are you concerned that from the investors’ panic modus – which can clearly easily spill over to other parts of the world as well – are you concerned that something like that could happen if the Chinese state really let them fall?

As I told you, for the moment what we are seeing is China-centric impact and exposure, and I can’t speak for the United States. I can say for Europe that its direct exposure is limited.

We have a very important election coming up on Sunday. I know you don’t really like to talk about German politics but just in terms of political risk, I’ll frame it a bit wider, the question. We also have the French election next year and then the year after, the Italian election. Are you concerned that political risk might be back in Europe, especially as a leader of 16 years is going to leave?

Well, I will take this opportunity to salute the 16 years that have been completed and pay tribute to Chancellor Merkel, who has done so much on the international scene in particular, representing Germany. Any uncertainty is always propitious to movements and anticipation and fear, so I would say that once the election is over and you have more certainty about the outcome, pending coalition discussions, then it’s a better situation than before, because then you have the uncertainty. Who is it going to be? What kind of coalition will it be? Which President will be elected in France? I think that once the election is over, then everybody knows what to expect and prepares for that, so it reduces uncertainty, actually.

Perhaps we are terminating the interview with a look back to perhaps a common experience with Angela Merkel, as you were saluting her for her 16 years, and her role as an international diplomat. If you look back, what kind of memories do you have and perhaps the most important meeting or memory you have from working together with her?

Dozens of G7, G20, but I think the one that I will cherish is this time when the two of us went to the concert hall together, just very privately. She had one security officer, I had one. We went together in the same car and people were so respectful and discreet about her in Berlin, going to the concert, that was a lovely moment. It was Daniel Barenboim conducting, so what else can you wish?!

I bet it was a great evening!

Yes – and we had a lovely dinner after that.

Thank you very much for talking to us today.

My pleasure.

MIL OSI Economics