Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

ECB president Lagarde: has she become unstoppable?

Peter Bofinger 19th June 2023

Asserting the need for further interest-rate rises, Peter Bofinger writes, is not the same as evidencing them.

ECB,Lagarde,president
The ECB president, Christine Lagarde—a pause in interest-rate hikes ‘not discussed’ (Alexandros Michailidis / shutterstock.com)

I’m so confident
Yeah, I’m unstoppable today

Song by Sia

In retrospect, it is rather obvious that in 2022 the European Central Bank reacted too late to the inflationary wave that had been building up, mainly due to the Ukraine war. Today, there is again the risk that the ECB is behind the curve. But this time it risks pressing for too long on the brake, with serious risks for the real economy and the stability of the financial system of the euro area.

At her press conference last Thursday, the ECB president, Christine Lagarde, correctly described the current situation as ‘unprecedented’ and ‘exceptional’. The decisions the bank had made since last September, she said, were ‘monumental, by all accounts, both in terms of speed, [and] in terms of height, [the] volume of hikes’. Seven increases from that month, with the latest taking effect this week, have raised the ECB’s key rates by 3.5 percentage points.

After such an historically heavy dose of monetary restriction, one would except the ECB carefully to discuss whether further interest-rate rises remained warranted—or whether it would be better to wait until the effects of its shock therapy had become more visible. Yet, asked to consider skipping envisaged rate rises, Lagarde bluntly replied: ‘In terms of having to pause or having to skip: as I said, number one, we have not discussed it at all and we have not begun thinking about it because we have work to do.’ She left open what kind of work it was that prevented the ECB from its core task of thinking about its policy rates. 


Become part of our Community of Thought Leaders


Get fresh perspectives delivered straight to your inbox. Sign up for our newsletter to receive thought-provoking opinion articles and expert analysis on the most pressing political, economic and social issues of our time. Join our community of engaged readers and be a part of the conversation.

Sign up here

Brushed aside

The president dealt in similarly brusque fashion with the quite valid question about the ECB’s estimation of a ‘neutral rate’. A widely discussed theoretical concept, this helps identify whether the current policy rate is restrictive (above neutral) or stimulative (below). Lagarde brushed aside the question without further ado: ‘So, in a way we don’t have to ask ourselves whether we are at neutral rate or not.’

In the absence of such a yardstick, according to what data is the ECB so fully convinced of the necessity for further rate increases? Lagarde elaborated that members of its governing council had looked very much at the data and the ECB had revised its projection of future inflation. Now forecast at 2.2 per cent in 2025, she described this as ‘not satisfactory’ and ‘not timely’.

But while it is useful to base monetary policy decisions on inflation forecasts, the ECB’s performance has been very poor in this regard (see table). For the year 2022, the difference between the figure forecast as of March 2021 and the final outcome was 7.2 percentage points. For the year 2023, so far, the difference between the first estimate and the most recent is still four percentage points. With all due respect to such forecasts, they cannot be regarded as sound evidence for stubbornly raising interest rates.

  Forecast for
Forecast date2022202320242025
Mar-211.21.4
Jun-211.51.4
Sep-211.71.5
Dec-213.21.81.8
Mar-225.12.11.9
Jun-226.83.52.1
Sep-228.15.52.3
Dec-228.46.33.42.3
Mar-238.45.32.92.1
Jun-238.45.432.2
Deviation from first forecast (pp)7.241.20.1

A nuanced approach by the ECB to interest-rate policy would start with the widely-shared insight that monetary policy is operating with long and variable lags. Lagarde concurred, to a degree: ‘There is some lag time—not that much by textbook standards, which will typically say that it’s anywhere between 18 and 24 months, maybe a bit more.’

A direct implication of such lags is that the effect of today’s—indeed yesterday’s—policy measures on inflation will only materialise after some time. If the central bank continues hiking rates until it clearly sees inflation come back to target, it will thus be too late in abandoning a restrictive stance. Asked about such transmission lags, Lagarde however said: ‘Suffice to say that we are seeing it already. Do we see all of it? Obviously, no. We want to see it all the way down to inflation.’

Short-term dynamics

Given all the uncertainties about the inflation outlook, it is surprising that the ECB’s policy statement only mentions the year-on-year inflation rates—so, for instance, the rate in May 2023 was the difference in the price level with May 2022—but not the short-term dynamics. Due to the strong inflation shock in 2022, with this approach there is a delay before a more recent deceleration of inflation becomes obvious.

Short-term inflation dynamics can be made visible by calculating the change in the (seasonally-adjusted) price level over, say, three months. To make this comparable with the annual data based on the year-on-year calculation, the three-month change is raised to the power of four.

Adopting this practice, widely used in the United States, one can see that inflation in the euro area has already decelerated significantly (see chart). In May 2023, the headline rate was only 1.8 per cent. Core inflation (excluding food and energy) has come down to 3.9 per cent and even inflation in services, which the ECB regards with particular concern, shows some slowing.


Support Progressive Ideas: Become a Social Europe Member!


Support independent publishing and progressive ideas by becoming a Social Europe member for less than 5 Euro per month. You can help us create more high-quality articles, podcasts and videos that challenge conventional thinking and foster a more informed and democratic society. Join us in our mission - your support makes all the difference!

Become a Social Europe Member

Picture 1 4

Of course, such short-term dynamics can be volatile and misleading. But it is unclear why, in its public communication, the ECB is not making use of such information. From the public’s side, fortunately the bank’s survey of consumer inflation expectations shows eurozone households anticipate an inflation rate of 2.5 per cent for the next three years—so low expectations are relatively well anchored.

Coarse rhetoric

What could be the motivation behind the ECB’s coarse rhetoric (‘we have work to do’)? Does the bank want to manifest hawkishness after having been too dovish in 2022? Is it trying to impress the German audience which for years complained about the ECB’s purported lack of orientation towards price stability?

In the current situation, monetary policy faces not only a difficult trade-off between price stability and growth but also a balancing act between price and financial stability. While there is no doubt price stability is the ECB’s main target, its president should at least explain more convincingly why an ever-increasing dose of interest-rate hikes is really warranted.

This is a joint publication by Social Europe and IPS-Journal

Peter Bofinger
Peter Bofinger

Peter Bofinger is professor of economics at Würzburg University and a former member of the German Council of Economic Experts.

You are here: Home / Economy / ECB president Lagarde: has she become unstoppable?

Most Popular Posts

Russia,information war Russia is winning the information warAiste Merfeldaite
Nanterre,police Nanterre and the suburbs: the lid comes offJoseph Downing
Russia,nuclear Russia’s dangerous nuclear consensusAna Palacio
Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter
retirement,Finland,ageing,pension,reform Late retirement: possible for many, not for allKati Kuitto

Most Recent Posts

OECD,inflation,monetary The OECD and the Great Monetary RestrictionRonald Janssen
prostitution,Europe,abolition Prostitution is not a free choice for womenLina Gálvez Muñoz
Abuse,work,workplace,violence Abuse at work: who bears the brunt?Agnès Parent-Thirion and Viginta Ivaskaite-Tamosiune
Ukraine,fatigue Ukraine’s cause: momentum is diminishingStefan Wolff and Tetyana Malyarenko
Vienna,social housing Vienna social-housing model: celebrated but misusedGabu Heindl

Other Social Europe Publications

strategic autonomy Strategic autonomy
Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship

ETUI advertisement

The future of remote work

The 12 chapters collected in this volume provide a multidisciplinary perspective on the impact and the future trajectories of remote work, from the nexus between the location from where work is performed and how it is performed to how remote locations may affect the way work is managed and organised, as well as the applicability of existing legislation. Additional questions concern remote work’s environmental and social impact and the rapidly changing nature of the relationship between work and life.


AVAILABLE HERE

Eurofound advertisement

Eurofound Talks: does Europe have the skills it needs for a changing economy?

In this episode of the Eurofound Talks podcast, Mary McCaughey speaks with Eurofound’s research manager, Tina Weber, its senior research manager, Gijs van Houten, and Giovanni Russo, senior expert at CEDEFOP (The European Centre for the Development of Vocational Training), about Europe’s skills challenges and what can be done to help workers and businesses adapt to future skills demands.

Listen where you get your podcasts, or for free, by clicking on the link below


LISTEN HERE

Foundation for European Progressive Studies Advertisement

The summer issue of the Progressive Post magazine by FEPS is out!

The Special Coverage of this new edition is dedicated to the importance of biodiversity, not only as a good in itself but also for the very existence of humankind. We need a paradigm change in the mostly utilitarian relation humans have with nature.

In this issue, we also look at the hazards of unregulated artificial intelligence, explore the shortcomings of the EU's approach to migration and asylum management, and analyse the social downside of the EU's current ethnically-focused Roma policy.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

WSI European Collective Bargaining Report 2022 / 2023

With real wages falling by 4 per cent in 2022, workers in the European Union suffered an unprecedented loss in purchasing power. The reason for this was the rapid increase in consumer prices, behind which nominal wage growth fell significantly. Meanwhile, inflation is no longer driven by energy import prices, but by domestic factors. The increased profit margins of companies are a major reason for persistent inflation. In this difficult environment, trade unions are faced with the challenge of securing real wages—and companies have the responsibility of making their contribution to returning to the path of political stability by reducing excess profits.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube