At a European Parliament committee hearing, ECB President Christine Lagarde said that “the legacy of the financial crisis have driven interest rates down”. Such “low interest rate and low inflation environment has significantly reduced the scope for the ECB and other central banks worldwide to ease monetary policy in the face of an economic downturn”. There were also structural challenges like “environmental sustainability, rapid digitalisation, globalisation and evolving financial structures”. Hence, it’s the “appropriate time” to conduct the policy strategy review.

On the economy , she said there are “tentative signs of stabilisation” in the global economy but uncertainty surrounding the impact of the coronavirus is a “renewed source of concern”. Overall moderate growth performance is “pass-through from wage increases to prices” and inflation remain subdued. Hence, the Eurozone economy “continues to require support from our monetary policy, which provides a shield from global headwinds.”

ECB Monthly Bulletin basically echoes Lagarde’s comments. It noted that Eurozone expansion will continue to be supported by “favourable financing conditions”. Risks remain “titled to the downside” in Eurozone due to ” geopolitical factors, rising protectionism and vulnerabilities in emerging market economies”. But the risks have “become what less pronounced”.

In today’s conference in Madrid, Pablo Hernandez de Cos, a member of the ECB Governing Council, emphasized the need for patience in the bank’s approach to interest rates.

De Cos pointed out, “If we keep rates at these levels long enough, there are very good chances that we will be able to reach our 2% target in a timely manner.”

De Cos added that a balanced approach was crucial “to avoid both insufficient tightening, which would impede the achievement of our inflation target, and excessive tightening, which would unnecessarily damage economic activity and employment.”

Echoing a similar sentiment, fellow Governing Council member Francois Villeroy de Galhau warned against an aggressive tightening stance. He said, “If the ECB tightens too much, the central bank could run the risk of having to rapidly reverse course.”

Villeroy de Galhau further advised against a reckless calibration of monetary policy, asserting, “‘testing until it breaks’ is not a sensible way.” Instead, he recommended a shift in focus from constantly elevating rates to maintaining a consistent policy. In his words, the emphasis should be on “duration rather than level.”

ECB kept the envelope of the Pandemic Emergency Purchase Programme (PEPP) unchanged at EUR 1850B, and will continue purchases until at least the end of March 2022. Nevertheless, the Governing Council now “judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters.” ECB will now “purchase flexibly” according to market conditions, over time, across assets classes and among jurisdictions.

Also, ECB kept main refinancing rate, marginal lending rate and deposit rate unchanged at 0.00%, 0.25%, and -0.50% respectively. Forward guidance is maintained, which imply a transitory period of overshoot. The regular asset purchase program will also continue at a monthly pace of EUR 20B.

Full statement here.

ECB Executive Board member Isabel Schnabel said in a speech, “how today’s attack on Ukraine changes the euro area outlook is highly uncertain at this stage. We are monitoring the situation closely and will carefully evaluate the consequences for our policies.”

But “predating the war”, however, inflationary pressures will likely prove stronger and more persistent over both the near and the medium term”. “policy optionality” is there fore needed.

The “calibration and the time of adjustment of our policy instruments are data-dependent”, but the “sequence… is not”. The forward guidance has provided the conditions for policy rates to be raised. Net purchases under the APP will stop “shortly before” rate hikes. Reinvestment will continue for an “extended period of time” past rate hikes.

Balance sheet adjustments may not be well-suited as the main instrument for controlling the overall stance. Hence “policy lift-off will predate with some distance a reduction of our balance sheet.”

Overall, she concluded, the “shock of war hanging over Europe has clouded the global outlook”. The “uncertainty speaks in favour of a gradual and data-dependent normalisation that respects the sequence that we have communicated, with a view to reducing uncertainty about our actions and intentions.”

Full speech here.

ECB Vice President Luis de Guindos expressed cautiously optimistic view on the trajectory of inflation in Eurozone. But he also emphasized that the central bank is data-dependent regarding cutting interest rates, rather than time-dependent.

“There has been good news regarding the evolution of inflation, and that — sooner or later — will end up being reflected in the monetary policy,” he told Spain’s RNE radio.

However, he was clear about ECB’s stance being firmly grounded in data-driven decision-making. Guindos emphasized the absence of a fixed timetable for policy changes, stating, “We are going to be dependent on the data, we don’t have any kind of calendar, it will depend on the evolution of inflation.”