Lagarde Says Market Can Test ECB Resolve as Much as It Wants

European Central Bank President Christine Lagarde said policy makers won’t shy away from using all their powers should investors try to push bond yields higher.

“They can test us as much as they want,” she said in a Bloomberg TV interview on Wednesday. “We have exceptional circumstances to deal with at the moment and we have exceptional tools to use at the moment, and a battery of those. We will use them as and when needed in order to deliver on our mandate and deliver on our pledge to the economy.”

Lagarde Says Market Can Test ECB Resolve as Much as It Wants

The ECB has accelerated its emergency bond-buying program to push back against a rise in borrowing costs that threatens to undermine the euro area’s recovery. Yields have risen as part of a global reflation trade on the back of the U.S. economic rebound, yet the euro zone is bogged down in extended virus restrictions and a slow vaccination rollout.

Central banks across the bloc bought an average of 20 billion euros ($23.5 billion) worth of debt a week over the past two weeks to keep financing conditions for governments, companies and households favorable. Lagarde declined to say if policy makers have agreed on that specific level of purchases, as Governing Council member Vitas Vasiliauskas signaled in an interview this week.

“Given the exceptional situation that we are facing we are using maximum flexibility” with the 1.85 trillion-euro program, Lagarde said. “We will deploy all of it or not, or more and we will certainly adjust as needed.”

Inflation Caution

The ECB predicts that the 19-nation economy will grow 4% this year. That’s not enough to recoup last year’s contraction of 6.6%, and the euro zone will likely return to its pre-pandemic size only in mid-2022, a full year behind the U.S.

The central bank says any near-term pickup in the region’s inflation will be temporary, with concerns over job losses keeping consumer demand in check over the medium term.

Figures published Wednesday showed consumer prices rose 1.3% in March from a year earlier, driven higher by a surge in energy costs. That’s below the ECB’s goal of just-under 2%, and a measure that strips out volatile components such as food and fuels slipped to 0.9%, the lowest in three months.

Lagarde Says Market Can Test ECB Resolve as Much as It Wants

“Many have expressed concern about the consequences of a loose monetary policy,” policy maker Olli Rehn said in a webinar on Wednesday. “Fear of inflation coming to the fore, hyperinflation -- however, there are no signs of this. On the contrary, inflation threatens to remain too slow in the euro area.”

The ECB’s pandemic bond program is set to run until the end of March 2022, though Lagarde said it can be extended if necessary, and the central bank will give investors plenty of warning when it’s ready to stop.

“It’s not as if it were set in stone,” she said. Once it’s time to wind down, policy makers will give “sufficient early notice to avoid the anxiety, the tantrum, or any of those movements” that have happened in the past.

Lagarde also said she hopes the European Union’s 750 billion-euro joint recovery fund will start being deployed as scheduled in the second half of the year.

Spending plans are still being assessed by the European Commission, and laws to approve the bond issuance to fund the program still need to passed by all national governments. That has raised concerns that hurdles such as a legal challenge in Germany will delay disbursements.

“We have an economic situation overall which in this part of the world, Europe, is really marked by uncertainty,” Lagarde said. “What monetary policy has to do and what the ECB has to do is to provide as much certainty as possible.”

©2021 Bloomberg L.P.

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