Lagarde Pinpoints June as Moment for Clarity on ECB Pullback

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European Central Bank President Christine Lagarde signaled officials’ next meeting in June will start the clock ticking toward interest-rate hikes as they determine an exact end to asset purchases to combat growing inflation risks.

Speaking after the ECB renewed a pledge to conclude bond-buying in the third quarter but declined to be more precise, Lagarde said policy makers gathering in eight weeks’ time will have to incorporate an “element of judgment” as they assess fresh economic forecasts amid heightened uncertainty caused by the war in Ukraine.

Facing inflation that’s almost four times their 2% target alongside threats to the euro zone’s pandemic rebound, officials are cautiously winding down stimulus and contemplating “gradual” rate hikes “some time after” the termination of asset purchases.

Markets are currently pricing in quarter-point increases in September and December that would bring the deposit rate to zero.

“Our forward guidance will be determining and helping us determine at the June projection meeting if we decide to terminate net asset purchases, what exactly will be the policy going forward in terms of rates,” Lagarde said Thursday by video link from her home as she recovers from Covid-19.

Increases in borrowing costs could follow “anywhere between a week to several months” after the end of quantitative easing, she said.

While the ECB is still well behind the Federal Reserve and the Bank of England in raising borrowing costs, the faster timetable for withdrawing stimulus that it unveiled in March underlines an increasing focus on taming price pressures.

“Upside risks surrounding the inflation outlook have also intensified, especially in the near-term,” Lagarde said. “We are very attentive to the current uncertainties and are closely monitoring the incoming data.”

Those numbers include perceptions of the trajectory for consumer prices, which Lagarde said are shifting higher. “The last thing we want to see is inflation expectations at risk of being de-anchored,” she said. 

Lagarde also commented on reports the ECB is crafting a tool to deploy should bond yields advance excessively on the euro zone’s periphery as quantitative easing is wound down. She said flexibility is crucial to monetary policy going forward, and that officials could build a new instrument “in short order” if required.

Investors recently have been focused on what would happen if the war in Ukraine leads to a ban on imports of oil and natural gas from Russia. Germany, Europe’s biggest economy, was warned this week it could face a 220 billion-euro ($240 billion) hit to output over the next two years in the event of a sudden embargo. 

Lagarde said such a step would have a “significant impact.” Nevertheless, she stressed that the path toward normalizing monetary policy is appropriate in light of the dangers to inflation.

“The journey has begun, it is moving along as predicted,” Lagarde said. “We want to have both flexibility and move gradually and keep all the options open.”

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