Interview with Nikkei
Interview with Christine Lagarde, President of the ECB, conducted by Shogo Akagawa on 8 May 2023
10 May 2023
You repeatedly mentioned at the last press conference that the inflation outlook continues to be “too high for too long”. How strong is the upside risk of inflation in the eurozone?
There are factors that can induce significant upside risks to the inflation outlook. And we are still in a situation where uncertainty about the path of inflation is high, so we have to be extremely attentive to those potential risks, the exact list of which you will find in our latest monetary policy statement, in particular in relation to wage increases in various European countries.
We now see waves of strikes across Europe. How serious is the risk of a wage-price spiral as a second-round effect?
The protests, collective bargaining and, in some cases, strikes that we observe in Europe are not surprising, because last year was one where real wages went down significantly. And there is now a process of catching up and making up for the lost ground in real wage terms.
The numbers appear large on the face of it. Take for example the recent wage agreements in Germany and Spain, which are both in double digits over a period of two and three years respectively. It’s a catch-up process that is taking place, but we have to remain very vigilant.
Europe’s macroeconomic situation now seems to be better. Do you think the eurozone could avoid recession and that the growth rate will remain positive?
We do not have a recession in our baseline projection for 2023, and we are in a better position than what we feared six months ago. Back then everybody was talking about at least a technical recession, and we have avoided that over the winter.
This is attributable to various factors, but two are key: first, the fall in energy prices; second, the easing of the supply bottlenecks, which have impacted manufactured goods in particular. We’re seeing that easing in shipping, the price of freight, delays indicated by corporations, the level of inventories – all of these indicators are pointing in the same direction. And if you add to that some still-lagging effects of the recovery that took place a few months ago, we have a series of factors which point to more positive growth than we had anticipated. But we still have a lot of uncertainty out there, including what will happen in Russia’s war of aggression against Ukraine and some emerging signs of weakness in demand for manufactured goods.
How significant do you think geopolitical risk is for Europe’s future? Are you concerned about the impact on energy supplies of the Russian aggression?
Even without any Russian supplies, the European position is solid. We went through the winter season without rationing, without massive disruption. That was down to three factors. First, in part, the mild weather. Second, our ability to find alternative sources of supply, particularly gas. And third, the capacity of Europeans to actually reduce their demand. But we have to be attentive, and energy remains one of the uncertainties that can affect future output as well as inflation numbers.
How long will you keep your tightening cycle? Can we exclude a rate hike in the autumn?
Given the process that we have adopted and the environment in which we operate, we’ve decided two things: one, we will be data-dependent; and two, our reaction function will determine the data that will be important to us. Our reaction function will be anchored in the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, and this will dictate our decisions going forward.
Between core inflation and headline inflation, which is the most important statistic for the European Central Bank (ECB) to analyse monetary policy?
Headline inflation is the measure that we target and that we have agreed will determine whether or not we deliver price stability. This is because what ultimately matters are the prices that people directly experience, and that means we need to target a measure that includes food and energy. That’s our thermometer, that’s what we are committed to doing.
We do, however, look at measures of underlying inflation. “Core” is one such measure, but there are also others – for example, those that exclude more volatile items or focus more on domestic inflation pressures. And why do we filter inflation in that way? It’s to arrive at the “heart” of inflation, the most persistent element in those price indexes that can help us understand where headline inflation is likely to settle in the medium term. That’s a good way to identify in real time whether our policy action is actually biting, and whether we see supporting evidence that, yes, we have attacked inflation hard enough.
There is some criticism that the ECB reacted too late when beginning to raise interest rates. What is your response?
We were coming from ten years of very accommodative monetary policy. But we completely changed tack – and rapidly. We started changing our policies already in December 2021, when we announced that we would discontinue net asset purchases under the pandemic emergency purchase programme (PEPP) and gradually reduce net asset purchases under the asset purchase programme (APP). We later announced that we would conclude net purchases under the APP and started rate hikes in July 2022. Since then we have raised rates by 375 basis points in less than a year – the fastest increase in our history. So we have moved in a very deliberate and decisive way in order to fight inflation. Could it have been done a little earlier? Possibly. Would it have made a huge difference? Probably not. What I know is that we are determined to tame inflation, to bring it back to our 2% medium-term target in a timely manner, and we have made a sizeable adjustment already. But we still have more ground to cover.
Regarding the APP, do you think it is necessary to go further and start selling assets? Regarding the PEPP, the ECB intends to reinvest until at least the end of 2024. Do you have any plans to accelerate the end of these reinvestments?
We have just announced that we expect to discontinue the reinvestments under the APP as of July 2023. Nothing further has been discussed by the Governing Council – neither a proposal to sell assets under the APP, nor a change to the forward guidance that we have given in relation to the PEPP. We have also mentioned that we would use flexibility in relation to the PEPP, if necessary to facilitate the smooth transmission of monetary policy, and there is no change to that at all.
What lessons can you draw from the financial market turmoil triggered by Credit Suisse and US banks, and how do you account for them in financial regulation and ECB stress tests of European banks? What do you think of risks from non-banks?
A first lesson, probably, will be that we have to apply the existing regulatory framework scrupulously. I’m talking here about Basel III. Second, the Basel III set of rules needs to apply to a large set of banking institutions, not to a narrow group. Third, supervision needs to be intrusive and as granular as possible. Fourth, the Financial Stability Board and the Basel Committee on Banking Supervision should look very carefully at the non-bank financial sector to make sure that we do not have significant risks on the horizon.
How do you deal with Additional Tier 1 (AT1) bonds?
Concerning AT1, in the EU we have clarified that we have a pecking order which requires equity holders to be the first port of call in the event of losses. And we have made clear that there is no possibility for this to be changed, even by contractual arrangement, because it’s the Capital Requirements Directive that applies throughout the EU.
When do you plan to launch the digital euro? Is 2027 the goalpost for launching?
The next step will be in October 2023 when the Governing Council will have to decide whether we move into the next phase – experimenting with the digital euro. During that next phase we will be checking all the potential errors, the potential traps, the potential shortfalls, the way in which it will operate on a cross-border basis. After this phase is over, the decision will be made to finally launch it or not. I don’t have a set date, but it would not surprise me if it was 2026 or 2027.
Compared to the Bank of Japan, the Federal Reserve System or the Bank of England, one of the characteristics of the ECB is that the eurozone includes smaller markets that depend on communicating with bigger markets. Is fighting euro scepticism a difficulty in your job?
You are right that in Europe we have a fragmented capital market. We do not yet have a capital markets union, and it’s an added difficulty because we are talking to multiple markets that are smaller than the market Governor Ueda is talking to – he is talking primarily to the Tokyo market – and then of course to all the other markets in the world, because we’re not addressing only one geographic market. Markets are cross-border.
You now have 20 Member States in the eurozone, which could increase in the future. Is there any dilemma, as you always have to seek consensus in your Governing Council?
I think overall, in very tough and uncertain times, in almost all cases, we have managed to rally enough consensus around the table. I would like to think that it is because of me, but I think it has more to do with the fact that we are all driven by the same objective, which is our mandate. We are all driven by the public interest of the European Union and the euro area, and we are prepared to make compromises. There are different perspectives and intellectual backgrounds as well as macroeconomic circumstances. If you look at, for instance, Latvia and compare it with Malta, you are talking about completely different inflation rates. The structure of the German economy is different from that of Italy or Spain. This has to do with the way in which those economies were built over the course of history. It is that very rich diversity that comes together around the table to form a common view on the optimal policy to arrive at price stability. And so far it’s worked. And it’s also my way of working; I’m not a dictatorial central bank governor.
The G7, especially Europe, has a role in leading the discussion on sanctions against Russia. How can the effectiveness of sanctions be improved? How can the ECB contribute to this?
We can spot unusual flows of funds in and out and we can mention to the appropriate authorities what we observe. That’s our contribution to the sanctions. In addition to finding loopholes, it’s important for the Member States and the European Commission to identify the ways in which some people try to circumvent and to bypass the sanctions so that they can be implemented with full efficiency.
What impact will “greenflation” and “decarbonisation” have on monetary policies in the long term?
In the long run, if our economies rely more substantially on renewable energies, the impact will be disinflationary. But in the short term, we know that investments will be needed in significant amounts, both to invest in these renewable energy production facilities and also to invest in fossil energy – such as liquified natural gas terminals – in order to transition smoothly to the green energy that everybody is calling for. So, in the first instance, there is likely to be an element of price increases as a result of this massive flow of investment.
In the very short term, what has caused energy prices to go up is not so much green policies but the increase in electricity prices caused by the sudden cut-off of Russian gas. So, the contribution to high prices is to be found in the fossil fuel industry, not “greenflation”.
Over the past decade the political pressure on central banks, including the ECB, has been increasing, because the central bank can avoid parliamentary decisions and react very quickly. Could this lead to difficulties in maintaining independence?
Number one, the independence of the ECB is enshrined in the Treaty that founded the EU. It’s in the hardest law that we can have. And it’s very, very specifically mentioned that European leaders cannot try to influence me or my colleagues in any particular shape or form. This would be against the law. Second, we have a mandate, which assigns us one objective, not two like at the Federal Reserve. Our objective is price stability. And third, I’m accountable to the European Parliament. Every quarter I present our policy decisions, our assessment of the macroeconomic situation, and I take all the questions that they have for me to explain and document and justify the decisions that we’ve made. So you have a combination of independence, narrow mandate and accountability, and the three of them form the operational framework in which we function.
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