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ECB Task Isn’t Clouded by Financial-Risk Worry, Lagarde Says

ECB Task Isn’t Clouded by Financial-Risk Worry, Lagarde Says
Christine Lagarde, president of the European Central Bank, at a rates decision news conference in Frankfurt, Germany, on Thursday, 16 March 2023. (Photo: Alex Kraus/Bloomberg)

The European Central Bank doesn’t see any conflict between its inflation-targeting mission and its responsibility to stave off financial-system threats, President Christine Lagarde said. 

“Price stability goes with financial stability, and they are both present and come together — but there is no trade off,” she told lawmakers in Brussels on Monday. “Financial stability to the extent that it impacts the economic situation, to the extent that it impacts our projections, has an impact on how we see the situation from a macroeconomic point of view, but they are two different stabilities addressed by different tools.”

The comments expand on a theme Lagarde already touched on last Thursday after the ECB raised interest rates by a half point and didn’t provide a signal on further moves.

In an opening statement to the European Parliament, the president stuck closely to wording used last week that officials “stand ready to respond as necessary to preserve price stability and financial stability,” and then she also repeated remarks made on Sunday to “welcome the swift action and the decisions” by Switzerland over Credit Suisse Group AG.

“We are using the interest rates that we have and this was the case last week, this was the case before because we have enough ground to cover to move at the pace where we are moving,” she said. “As far as financial stability is concerned, we have all the tools that will be needed,” and “those tools will be used if necessary,” she said.

Some policymakers have argued that monetary tightening will probably need to continue when tensions subside. Latvian central-bank chief Martins Kazaks told Bloomberg in an interview published on Monday that borrowing costs must rise further “if the baseline scenario holds and market volatility calms down and does not derail the scenario.”

ECB Sees Inflation Closer to Target in 2025 |

By contrast, his Greek colleague Yannis Stournaras warned on CNBC Europe that the ECB is now “close to the end of the tightening cycle” and that “rate hikes are mostly now a story of the past.”

Lagarde’s remarks didn’t give a signal either way in the debate, although she did acknowledge how banking turmoil might ultimately cause officials to change view.

“Financial-stability tensions might have an impact on demand, and might actually do part of the work that would otherwise be done by monetary policy,” she said. “That impact is uncertain at this point in time, but it will have to be taken into account when we produce our next projections, and also when we do our next assessment and decide our next monetary-policy move.”

The ECB’s most recent economic projections — which were finalized before the failure of Silicon Valley Bank sent ripples through the financial system and UBS Group AG agreed to take over embattled rival Credit Suisse — see inflation closer to the central bank’s 2% target by 2025, but still lingering above it.

While defending the rate hike, Lagarde acknowledged just how much financial-system tensions impacted last Thursday’s decision.

“Given the distance that we have to cover and the inflation that we are facing, this 50 basis points was a robust decision that needed to be taken,” she said. “We would have indicated that subsequent hikes would be needed, but in the face of the uncertainty that we had, it would not and it was not the right policy indication to give.”


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