Interview with Christine Lagarde, President of the ECB

This article is about an interview conducted by Petri Sajari with Christine Lagarde, President of the European Central Bank (ECB), on February 25th, 2023. In the interview, Lagarde discussed the European Commission’s prediction of narrowly avoiding a technical recession, the main reasons for the better-than-anticipated economic developments in the euro area, inflation, and the ECB’s monetary policy decisions.

Avoiding a Recession

The European Commission said last week that the euro area is set to avoid a technical recession narrowly. Before that, a recession was expected at the turn of the year. When asked how confident she was that a recession is now avoidable in the euro area, Lagarde noted that the most recent projections from both the IMF and the European Commission suggest that there will not be a recession in the EU or the euro area this year. However, she also noted that there is a lot of uncertainty. She highlighted the importance of wage negotiations and fiscal support in determining the war’s trajectory, as well as the effect of the lifting of COVID restrictions in China on its economic recovery and the global economy.

Main Reasons for the Better-than-Anticipated Economic Developments in the Euro Area

When asked what she thought were the main reasons for the better-than-anticipated economic developments in the euro area, Lagarde highlighted the warm winter, a manifestation of climate change, and the solidarity between euro area countries. In addition, she noted that European countries have responded to President Putin’s unlawful and unjustified war by working together and that governments are cooperating on securing energy supplies.

Inflation

When asked about inflation, Lagarde noted that headline inflation is still unacceptably high, but it is likely to decline because energy costs are falling. Core inflation, however, is still at its highest level ever. She also noted that the ECB intends to raise interest rates by another 50 basis points at the next monetary policy meeting in March and will evaluate the subsequent path of monetary policy.

Monetary Policy Decisions

When asked if the Governing Council should also stand ready for a 50 basis point tightening in May after March if the incoming data warrant it, Lagarde noted that she wanted to see the new data and hear the views of her colleagues before taking a decision. However, she also said that the ECB intends to promptly bring inflation back to 2%.

Forecasting Errors

When asked about forecasting errors, Lagarde noted that most economists and forecasters initially anticipated that high inflation would be transitory and temporary and would fade away. However, this was not the case, and the ECB had underestimated earlier inflation.

Related Facts

• Headline inflation is still unacceptably high in the euro area.
• The ECB intends to raise interest rates by another 50 basis points at the next monetary policy meeting in March.
• European countries have responded to President Putin’s unlawful and unjustified war by working better together.
• Most economists and forecasters initially anticipated that high inflation would be transitory and temporary and would fade away.

Key Takeaways

• The European Commission said last week that the euro area is set to avoid a technical recession narrowly.
• The euro area has benefited from a warm winter, energy-saving measures, and the solidarity between euro area countries.
• Headline inflation is still unacceptably high but will likely decline because energy costs are falling.
• The ECB intends to raise interest rates by another 50 basis points at the next monetary policy meeting in March.
• Most economists and forecasters initially anticipated that high inflation would be transitory and temporary and would fade away.

Conclusion

The interview with Christine Lagarde showed that the euro area is set to narrowly avoid a technical recession due to the warm winter, energy-saving measures, and the solidarity between euro area countries. Inflation is still unacceptably high but will likely decline because energy costs are falling. The ECB intends to raise interest rates by another 50 basis points at the next monetary policy meeting in March. Most economists and forecasters initially anticipated that high inflation would be transitory and temporary and would fade away.