The President of the European Central Bank, Christine Lagarde, said that officials of this financial institution may soon review their portfolio of so-called pandemic bonds worth €1.7 trillion ($1.9 trillion) and change their position on how long they will replace securities with maturity.
The specified statement was made by Christine Lagarde on Monday, November 27 before lawmakers of the European Parliament. She also said that the financial institution she heads will continue to reinvest at least until 2024. According to her, the relevant issue is likely to be submitted for discussion and consideration by the Board of Governors shortly. She admits the possibility that the position of the European Central Bank on this theme will be revised.
Currently, several officials believe that it is necessary to discuss the early start of the curtailment of the so-called PEPP program. In this case, Christine Lagarde takes a more restrained position. After the last policy meeting, held in October, she stated that there had been no discussion of this issue. At the same time, Christine Lagarde did not go into details.
Current guidance provides that reinvestments will continue until the end of 2024. In this case, an important circumstance is that reinvestments can flexibly be applied in different jurisdictions to counter any fragmentation in the euro area bond market. For this reason, even some officials with a radical position do not intend to abandon the said tool.
The head of the Austrian central bank, Robert Holzmann, said last week that he favors discussing the revision of the bond portfolio at the December policy meeting, noting support for measures to gradually reduce reinvestment starting in March.
In the context of discussing the economic prospects, Christine Lagarde noted the weakening of the labor market. This indicator is a key factor that policymakers pay attention to to determine the degree of influence of monetary policy tightening on the situation. Christine Lagarde said that the state of affairs in the labor market as a whole is stable, despite some signs that job growth may slow down by the end of 2023.
The European Central Bank, which is based in Frankfurt am Main, paused raising the cost of borrowing in October after a series of 10 relevant decisions. Analysts and investors believe that another increase in the deposit rate is not expected. Currently, this indicator is at the level of 4%. At the same time, some officials estimate as a probable decision to raise the deposit rate shortly.
On Thursday, November 29, data on unemployment in the EU will be published. Experts predict that the corresponding indicator will not change. If this assumption turns out to be true, the unemployment rate will remain at the current level of 6.5%. The economic slowdown has not become what can be described as a destabilization factor for the labor market.
Experts also expect that the data to be published on Thursday will show a further decline in inflation in November to the level of 2.7%. At the same time, analysts predict that the process of increasing the cost of goods and services will intensify in the coming months. In their opinion, this trend will be caused by the instability of energy prices. The latest forecasts of the European Central Bank do not suggest a return of inflation to the target of 2% until the second half of 2025. The underlying price pressure also remains high.
Christine Lagarde says that the short-term prospects for the European economy remain subdued. At the same time, it assumes that in the coming years, the economic system will strengthen as inflation continues to decline, real incomes to households recover and demand for exports from the eurozone grows.
Christine Lagarde expects a continued reduction of inflationary pressure. At the same time, she said that the overall increase in the cost of goods and services in the coming months may again demonstrate growth due to some underlying effects. Speaking about the medium-term prospects for inflation, Christine Lagarde noted that there is considerable uncertainty in this case.
The President of the European Central Bank is convinced that maintaining interest rates at the current level for a long period will contribute to the process of restoring price stability. Christine Lagarde says that one should pay attention to the various forces that influence inflation and focus on the mandate to ensure the steadiness of the cost of goods and services.
As we have reported earlier, German Budget Crisis Worsens.