Christine Lagarde: IMFC Statement
Statement by Christine Lagarde, President of the ECB, at the forty-
third meeting of the International Monetary and Financial Committee
Virtual IMF Spring Meetings, 8 April 2021
Since the previous
IMFC meeting in October 2020, global prospects have improved thanks to
the progress made in vaccination campaigns and the forceful policy
support provided to our economies. However, this brighter outlook
remains subject to considerable uncertainty, also regarding the path
of the pandemic and the rollout of vaccinations. We must therefore
continue to stand together to address this severe global challenge. In
this environment, it is crucial to refrain from withdrawing policy
support prematurely, either on the monetary or fiscal side. At the
same time, it is essential to push ahead with well-tailored structural
measures that will facilitate the reallocation of resources over time
to more viable sectors, minimise permanent scarring effects on our
economies and support potential growth in the medium term. Euro area
developments and outlook
The pandemic and related containment
measures will continue to adversely affect euro area economic activity
in the short term. Beyond the short term, activity should pick up
thanks to the lifting of confinement measures once there is broader
immunity, exceptional monetary policy measures, continued fiscal
policy support and a rebound in foreign demand. Overall, the risks
surrounding the euro area growth outlook have become more balanced,
although downside risks associated with the pandemic remain in the
near term. Improving global demand, also spurred by sizeable US fiscal
stimulus, and the progress in vaccination campaigns constitute upside
risks.
Inflation increased sharply at the beginning of this
year compared with the end of last year. The upswing reflected several
factors, most of which were temporary and statistical. Headline
inflation is likely to increase further in the coming months, but some
volatility is expected throughout the year, and the temporary factors
are expected to fade out of annual inflation rates early next year.
Underlying price pressures are likely to increase somewhat this year
due to current supply constraints and the recovery in domestic demand,
although pressures will remain subdued overall, also reflecting low
wage pressures and the past appreciation of the euro. Once the impact
of the pandemic fades, the unwinding of the high level of slack,
supported by accommodative fiscal and monetary policies, will
contribute to a gradual increase in inflation over the medium term.
Monetary policy
In December the ECB’s Governing Council
decided to expand the envelope of the pandemic emergency purchase
programme (PEPP) by €500 billion, to a new envelope of €1,850 billion,
and committed to purchase flexibly according to market conditions and
with a view to preventing a tightening of financing conditions that is
inconsistent with countering the downward impact of the pandemic on
the projected path of inflation. If favourable financing conditions
can be maintained with a flow of asset purchases that does not exhaust
the envelope by the envisaged end of the PEPP’s net purchase phase,
the envelope need not be used in full. Equally, the envelope can be
recalibrated if required to maintain favourable financing conditions.
In December we also extended the horizon for net purchases under the
PEPP to at least the end of March 2022 and the period of reinvestment
of the principal payments from maturing securities purchased under the
PEPP until at least the end of 2023. In parallel, we extended the
period over which very favourable terms apply to our targeted longer-
term refinancing operations (TLTRO III) to June 2022, and decided to
hold three additional operations under the programme before the end of
the year.
At our Governing Council meeting in early March, we
assessed recent changes in financing conditions against the latest ECB
staff macroeconomic projections. We observed that, since the start of
the year, euro area market interest rates had increased measurably on
account of a global repricing in the fixed-income market. While the
appropriateness of our stance is measured in terms of a broader set of
financing conditions, a sizeable and persistent increase in market-
based interest rates, if left unchecked, can translate into a
premature tightening of financing conditions. This would have been
unwarranted at a time when favourable financing conditions remain
necessary to underpin economic activity and safeguard medium-term
price stability. Therefore, based on the joint assessment of financing
conditions and the inflation outlook, the Governing Council announced
that it expects purchases under the PEPP over the second quarter of
2021 to be conducted at a significantly higher pace than during the
first months of the year. Europe’s response to the coronavirus
(COVID-19) shock
In the light of the economic fallout from the
resurgence of the pandemic, it is absolutely crucial for monetary and
fiscal policies to continue complementing each other in supporting the
euro area economy. Europe’s policy response to the pandemic has been
swift, decisive and unprecedented, both at the national and EU levels.
As regards fiscal policies, an ambitious and coordinated fiscal stance
remains crucial, as a premature withdrawal of fiscal support would
risk delaying the recovery and amplifying the longer-term scarring
effects. National fiscal policies should thus continue to provide
critical and timely support to firms and households most exposed to
the pandemic and the associated containment measures. At the same
time, these measures should, as much as possible, remain temporary and
targeted in order to address vulnerabilities effectively and support a
swift recovery without hampering structural changes in the economy.
The EU’s recovery instrument, the NextGenerationEU package, offers a
unique opportunity to modernise the European economy and address
divergences that could jeopardise the smooth functioning of the
monetary union. To this end, the recovery instrument needs to be used
to finance transformative and productivity-enhancing investment and
promote ambitious structural policies. Euro area banking sector
developments and financial stability issues
Thanks to the
strength of the public support measures, insolvencies have remained
remarkably low during this period of economic weakness caused by the
pandemic, notwithstanding a widespread deterioration in corporate
balance sheets. At the same time, the banking sector has managed to
support the economy by continuing to lend, also to the sectors most
affected by the lockdown measures. Euro area banks still have robust
capital and liquidity buffers, but they are facing heightened asset
quality risks and their profitability remains low. Vulnerabilities in
the non-bank financial sector have also increased owing to recent
market developments in a context of prolonged risk-taking and
deteriorating liquidity buffers. Financial system vulnerabilities
remain elevated overall, as the optimism in financial markets stands
at odds with weakened corporate balance sheets. Financial market
vulnerabilities have increased, with recent bouts of volatility
highlighting uncertainties and the potential for disorderly repricing.
Measures supporting firms and households should continue,
while remaining, as much as possible, temporary and increasingly
targeted in nature. It will be crucial for prudential authorities to
ensure that capital buffers can be used if needed to absorb losses and
support lending and avoid credit supply constraints. At the same time,
banks need to be proactive in identifying and managing credit risk. As
long as uncertainty remains high, we will encourage continued
prudence, and have asked banks to apply extreme caution and keep
distributions in the form of dividends, share buy-backs and variable
remuneration below a conservative threshold. In the medium term, after
the COVID-19 crisis, it will be important to look holistically at the
capital framework with a view to simplifying it and removing potential
obstacles to its effectiveness. The non-bank financial sector needs to
be made more resilient through regulatory reforms, given the growing
role of non-bank financial institutions in financing the real economy
and their interlinkages with the rest of the financial system.
International crisis response
As national authorities
continue to take the necessary steps to fight the pandemic, global
cooperation and resource and knowledge-sharing across nations remain
vital. Addressing international trade disruptions, preserving trade
openness and ensuring universal access to vaccines and treatments will
be of paramount importance for a durable global economic recovery.
Global cooperation has been instrumental in our response to
the pandemic so far. On the central banking side, this includes the
coordinated action by major central banks, including the ECB, to
enhance the provision of US dollar liquidity at the onset of the
crisis. In addition, the ECB’s agreements on bilateral euro swap and
repo line arrangements with some EU and EU neighbouring countries’
central banks to prevent euro liquidity shortages from morphing into
financial stability risks and to support the smooth transmission of
monetary policy. Support to the most vulnerable countries, including
through the G20 Debt Service Suspension Initiative and the
establishment of the Common Framework for Debt Treatments, has also
shown how the international community has stood together firmly to
address the pandemic and its consequences.
Further
international efforts will be needed to counter the effects of the
pandemic, to maintain a well-functioning international monetary system
and to support a global economy that is fit for the future. The ECB
supports the crisis response measures taken by the IMF and welcomes
the recent progress made towards a general special drawing rights
(SDR) allocation. It is a strong and important signal of constructive
multilateral cooperation helping the global recovery. It should be
accompanied by efforts to improve transparency and underpin the
exchange of SDRs through a broader set of voluntary trading
arrangements. Given the high debt levels worldwide, we are also
supportive of the IMF’s comprehensive work agenda on debt issues,
which will continue to be a key area of work. The upcoming review of
IMF surveillance is well timed to support a resilient global economic
system during and after the recovery phase. Bolstering the recovery
to transform the global economy
The current pandemic provides
a prime opportunity to build a more resilient future and make the
changes towards what we want to see, namely a greener, more digital
and more inclusive global economy. We welcome the plans to further
integrate climate change-related issues into IMF surveillance. At the
ECB, in the area of banking supervision, we published a guide on
climate-related and environmental risks in November 2020 to explain
how we expect banks to prudently manage and transparently disclose
these risks under current prudential rules. We have asked banks to
conduct self-assessments in the light of the guide and to draw up
action plans on that basis. Then, next year, we will conduct a full
supervisory review of banks’ practices. As part of our ongoing
monetary policy strategy review, we will examine the risks posed by
climate change and how they feed into the monetary policy framework.
In a similar vein, the international community has to continue to work
together to enhance cross-border payment systems to make them faster,
cheaper and more inclusive, and to address the opportunities and
challenges of the digitalisation of finance. At the ECB, discussions
are ongoing on whether to issue a digital euro to make our currency
fit for the digital age, as a complement to, not a replacement for,
cash.