Interview with Christine Lagarde, President of the ECB, conducted by Gerald Braunberger, Dennis Kremer and Christian Siedenbiedel on 23 November and published on 26 November 2021 26 November 2021 Madame Lagarde, inflation rates are increasing around the world. Inflation in the United States is 6.2%, while in Germany a rate of close to 6% is expected for November. Is inflation spiralling out of control? At the European Central Bank we are of course monitoring that very closely. And not only because our primary objective is maintaining price stability and inflation is a crucial indicator of that. But also because we know that inflation affects people. Those who are less privileged and less well off are the ones who suffer the most from inflation. That’s why we need to keep looking at
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Interview with Christine Lagarde, President of the ECB, conducted by Gerald Braunberger, Dennis Kremer and Christian Siedenbiedel on 23 November and published on 26 November 2021
26 November 2021
Madame Lagarde, inflation rates are increasing around the world. Inflation in the United States is 6.2%, while in Germany a rate of close to 6% is expected for November. Is inflation spiralling out of control?
At the European Central Bank we are of course monitoring that very closely. And not only because our primary objective is maintaining price stability and inflation is a crucial indicator of that. But also because we know that inflation affects people. Those who are less privileged and less well off are the ones who suffer the most from inflation. That’s why we need to keep looking at it very carefully.
Do you feel any effects of rising inflation in your own daily life?
Of course, the rise in energy prices is the most noticeable. After all, energy price inflation now accounts for around half of the high inflation rates. You can’t help noticing the price increase when you fill up your tank at a petrol station or buy heating oil for the winter. As a French person, I keep a close eye on the prices for good bread at the bakery. That stands out at the moment and is making many people worried – but we expect that this rise in inflation will not last. It will subside next year. We expect that the inflation rates will start to fall from as early as January.
What makes you so sure? Won’t there be second-round effects, if the trade unions demand higher wages to compensate for the higher prices?
Judging by what we know from surveys of employers and trade unions so far, no strong inflationary pressure is to be expected from that front for the time being. The negotiated wage settlements have been very moderate so far. For next year, somewhat higher wage demands are partly to be expected. But based on what we are seeing, the settlements should not be on a scale that might trigger a wage-price spiral.
Do you not think that employees could become nervous and nonetheless demand compensation for inflation if inflation rates now hit a level that has not been seen for many years?
That does not seem to be the case at the moment. And if we look at inflation expectations, both those which can be derived from the financial markets and those resulting from surveys, then most people do not expect higher inflation in the longer term. Inflation expectations have risen, but they are below our inflation target of 2%. We don’t see any de-anchoring of inflation expectations.
Do you personally never have any doubts that inflation might persist for longer than your experts are currently predicting?
I ask myself this question again and again. To answer it you have to consider what is driving the current high rates of inflation. I would distinguish three groups of driving factors. The first are statistical base effects which are related to the pandemic, such as the VAT reduction in Germany last year and its reversal, which are now sharply pushing up the price increase relative to the previous year. Similar passing pandemic effects can be seen in respect of package holidays, for example. These factors will automatically disappear next year, as they will fall out of the year-on-year comparison. Supply bottlenecks are a second group of drivers. Demand surged after the end of the first lockdown whereas supply is still constrained. These bottlenecks in, say, computer chips, containers and road haulage capacity are obviously persisting for longer than we had initially thought. But the situation will gradually improve next year in that respect too. The third group is energy prices. We expect that energy price developments will at least stabilise next year.
But surely nobody can know for certain how oil prices, say, will develop next year?
We at least see good reasons why the strong price increase in energy will not last into the second half of 2022. There is in any case no expectation in the oil futures markets that the price increase will continue. But we are seeking to evaluate and consider as many sources of information on this topic as we can.
Do you understand the special concerns in Germany about the high inflation rates?
Yes, I understand these concerns very well; inflation in Germany is higher than in some other countries – in Italy or France for example. In addition, there are cultural differences and a special history with inflation in Germany in the 1920s. The collective experience of inflation in Germany is a different one to that of France or Italy. I understand all that. That’s why we have to thoroughly explain why we nonetheless think our strategy is correct and that we are following price developments very carefully.
Many people in Germany have long been calling for signs that the ECB will tighten its monetary policy strategy.
If we were to tighten monetary policy now, we would expect it to have an impact in 18 months. That is the extent of the time lag before our monetary policy measures take effect. According to our forecasts, however, inflation would have fallen back again by then. We would cause unemployment and high adjustment costs and would nonetheless not have countered the current high level of inflation. I would find that wrong.
Prominent economists like Charles Goodhart think that the whole world is about to enter an era of higher inflation. Does that not worry you?
It goes without saying that we think about longer-term inflation developments. The issue is whether factors which have so far dampened inflation, such as demographic developments or globalisation, are now reversing and could lead to higher rates of inflation. There could be changes; after the pandemic firms may think differently about globalisation and relocating production to cheaper countries. Globalisation will change, but it will proceed and will in all likelihood continue to temper inflation.
But many firms have been talking about deglobalisation since the outbreak of the pandemic.
People have been talking about that for around a year, but it is not really observable in practice. The incentive for firms to cut costs will remain stronger than their desire for independence from suppliers and control over the supply chains. I don’t see any sustainable price-increasing development. By contrast, in my estimation, the changes in demographic developments could have an impact on the future path of inflation, as indeed could digitalisation. But all in all, I see factors that will suppress inflation in the longer term rather than factors that will drive it up. In any case, monetary policy has enough time to respond appropriately to such longer-term trends.
But are climate policies themselves not going to make energy more expensive and push inflation up, at least temporarily?
This could indeed be the case. If the governments keep their commitments on the Paris Agreement and the recent climate conference in Glasgow, it will have an impact on energy prices. Studies show that energy prices react to climate protection measures by increasing significantly at first. However, when demand falls, the price will drop significantly. This effect will materialise.
Deutsche Bundesbank President Jens Weidmann will step down at the end of the year. Will you miss him?
I will. I have the utmost respect for his intellect. I look back fondly on our many encounters over the past few years, for example at G20 meetings. There is one photo in particular that reminds me of that good cooperation– it shows us both at a G20 meeting in Mexico.
Are you not slightly relieved that Mr Weidmann – a big sceptic of the current ECB stance – will be gone?
I am not relieved in the slightest, just the opposite – I am a bit sad that he decided to go. But I am certain the German Government will choose a candidate that will represent the Bundesbank’s views and the concerns of the German people in a similar fashion. I paid close attention to Mr Weidmann’s speech at the Frankfurt European Banking Congress recently. In it, he described the Governing Council of the ECB as a place where any opinion and any concern can be voiced. I see that as part of my approach to leadership. I am 65 and my experience has taught me that it is good to bring people together, exchange arguments and talk openly about concerns and objections. It is only then that you can try to find as much consensus as possible. We cannot always unanimously agree on every single decision.
In a recent speech, Mr Weidmann called on the ECB not to underestimate inflation. Have you been doing that recently?
In recent quarters, we have had to gradually adjust our inflation forecasts. This is true. But most economists all over the world have not fared any better. This experience has taught us to consistently review our baseline scenario and adjust it when needed.
So can you assure us that you will raise interest rates when necessary?
Of course, we will act when necessary. When we see inflation reaching our two per cent target over the medium term, durably and sustainably – meaning not just for a short period of time – then the interest rates can rise again. Such an interest rate hike must serve our mandate of price stability, just like our entire monetary policy. When these conditions are met, no one will be happier than me to normalise monetary policy. Before we can raise rates, however, we will need to reduce our asset purchases.
Unconventional monetary policy measures have now become almost normal – is this not a problem? When asset purchases and negative interest rates were introduced, the general public was told that these measures were temporary. Many now doubt that the ECB will ever go back.
Back in the summer we unanimously approved the outcome of our monetary policy review. Part of that is the medium-term symmetrical inflation target of two per cent. We also agreed on what makes up our toolbox, and asset purchases are explicitly included. We need to ask ourselves which instruments work best to help us fulfil our mandate. We should keep all our tools ready, but we do not need to use all of them all the time.
In 2020, following the outbreak of the COVID-19 pandemic, the ECB launched the pandemic emergency purchase programme (PEPP), which has allowed it to buy bonds flexibly. Is it really going to end in March 2022, as you promised? The pandemic is coming back with a vengeance right now.
Under the current circumstances, I have no reason to doubt that we will stop net asset purchases under the PEPP in the spring. This does not mean that the PEPP will end completely – the maturing bonds need replacing and these reinvestments will need to continue. And let us not forget that we have other purchase programs in our toolbox. I sincerely hope – for the sake of everyone’s health – that the pandemic will be over in the spring and that we will be more resistant to the new infection waves like the one we are seeing in Europe now. That is out of my hands, though – it is up to the scientists who develop vaccines, and of course to the people themselves, who should decide to get vaccinated.
Robert Holzmann, the Governor of the Oesterreichische Nationalbank, has suggested that the ECB should stop all of its asset purchases next autumn if inflation has reached two per cent by then. What do you think of this proposal?
I generally do not comment on what individual heads of central banks have said. All opinions are welcome, but they should be expressed at the right time. That time is 15 and 16 December, when the Governing Council of the ECB meets again.
Some central banks, such as the Reserve Bank of New Zealand, have recently voiced concerns about a global rise in asset prices. Are you also concerned?
Asset purchases have been very efficient, but their impact may weaken over time. Therefore, we must always be mindful of their side-effects, for instance rising asset prices, to decide whether using this tool is still proportionate. Rest assured – we are paying very close attention to it.
Do you not feel that the side-effects are starting to dominate?
No, the impact of the bond purchases is still positive and clearly outweighs the negative side-effects.
Nevertheless, it seems like the ECB shies away from the exit for fear of spooking the financial markets.
It is my strong belief that monetary policy needs to work for all Europeans. The markets are not our primary audience, nor are they the main recipients of our communication. Nevertheless, we do need to pay attention to financial stability. There is no price stability without financial stability. The two are closely interconnected, although it is price stability that is our primary mandate. And our monetary policy affects the economy not only through banks, but also via the financial markets.
Some market players try to put the ECB under pressure by vociferously calling for interest rate increases – for example via Twitter. Do you pay attention to them?
I’m glad to say that I don’t have to follow all the things people say on Twitter. My press team takes care of that.
On the other hand, the ECB is increasingly accused − under the heading of fiscal dominance − of giving too much consideration to European countries’ high levels of debt.
Fiscal policy is not my area. However, I was really very satisfied with the developments on 20 July this year. Europe’s government leaders decided, together, to launch the Next Generation EU recovery fund, which will be able to issue common bonds at the EU level. Germany has also agreed to it. For this, I am very grateful to Angela Merkel who recognised the importance of the issue. It sent a very strong fiscal policy message.
Though, some critics considered the message rather questionable.
Unfairly. You know, the rest of the world always doubts Europe. I have lived long enough outside of Europe to know that and to regret it. However, that agreement in July was a clear demonstration that Europe takes the right decisions when it comes to it. It was a privilege for me, as ECB President, to be able to support this process. It was no stroll in the park. It was a tough debate that cost a lot of time and many long nights. However, it was a strong signal to the world. Now, though, the European governments have a duty to stick to the agreement and to deliver what they promised. They must implement the promised structural reforms and they must shape a strong Europe. Implementation is always the hardest part. I remember well the words of my friend, Wolfgang Schäuble, who – as a minister in the Council of European Finance Ministers – always said “Implementation, implementation, implementation.” He always looked at us very strictly as he said it. And he is right. In the next three years, we will see how well Europe can succeed in this.
Is the ECB then ready to act against the fiscal policy interests of EU Member States, if necessary? Is the ECB independent of political pressure?
We are an independent institution and of course our actions are independent of political pressure. A pressure, by the way, that I often observed abroad as Managing Director of the International Monetary Fund. It’s no fun for those central bank governors. That is why it is clear to me that we must focus on our mandate. We will simply ignore attempts to exert political influence.
Do you think the ECB will have to withstand even heavier political pressure in the future?
There may be attempts to exert more pressure. But it won’t lead to anything.
Doesn’t all of this depend on the success of your predecessor, Mario Draghi, who is now Italy’s Prime Minister? If Italy gets a handle on its problems, does the ECB President also sleep more peacefully?
All Member States and all European heads of government shoulder huge responsibility. The instruments are here; they are on the table. A good €800 billion is at the ready in the Next Generation EU recovery fund. Now governments must decide how they will use it. That is not my responsibility. However, they should know this can change the course of things.
You also wanted to change a few things at the ECB – for example, the way the ECB communicates with the public. Are you satisfied with the results so far?
We are working on it. Yes, it was my objective from the start to communicate simply without falling into the trap of oversimplifying. That is why, for instance, we have changed the introductory statement that I make before our press conferences after the meetings of the Governing Council. We have shortened it and cut back on the jargon. Sometimes we have used terribly complicated words to explain basic concepts. It doesn’t have to be like that. Without good communication, we cannot do our job as central bankers.
Nevertheless, the introductory statement is still hard to understand for people outside the world of finance.
Yes, that is true. My neighbour certainly won’t be reading it before bed. However, we can still make it more understandable. In times gone by, central bankers were proud of the fact that it was difficult, if not impossible, to understand them. I have the privilege of knowing the former Chair of the US Federal Reserve, Alan Greenspan, quite well. He would probably disapprove of my approach. Times have changed, however. In the world of fake news, nothing is more important than being properly understood.
There is need for explanation when it comes to your efforts to make monetary policy greener. For many climate activists, you are not doing enough. Greenpeace even paraglided onto the roof of an ECB building to call for more climate protection.
Yes, I remember that well. My first thought was: how dangerous is this – and how can we prevent an accident? Personally, I do not think it is a safe and appropriate way to express your point of view.
Do you perceive the type of criticism as unfair?
Civil organisations have to speak up when they deem it necessary. However, central banks are not in the driving seat when it comes to fighting climate change. We are not the ones who are steering the bus; that is more the governments and parliaments. But we are all sitting on the bus together. And everyone on the bus – that includes you and me – should not forget that climate change is about the survival of humanity. That is why, within our mandate, we have to take climate-related risks into account in our calculations. But of course the ECB does not decide on climate policy.
Let’s end with a personal question. How often is Europe’s monetary policy decided at your kitchen table?
More often than you might think. A few important decisions have been made there. For example, we made decisions on the pandemic emergency purchase programme, or PEPP, at my kitchen table. We were all in lockdown and I sat there without Zoom and without the video conferencing system. Unbelievable how quickly you forget it. Back then, we had one conference call after another. Luckily, we all knew each other well enough already to know who was speaking. Even if I had to ask every now and then.
You said you would see yourself as an owl when it comes to monetary policy. That is to say, you wouldn’t allow yourself to be limited to just one monetary policy position. After two years leading the ECB, do you still see yourself as an owl or are you now more of a dove?
Absolutely as an owl - guided by its mandate. Since I said that, friends from around the world now send me either figurines or photos of owls. I am now a passionate collector of owls.