Christine Lagarde: IMFC Statement
Statement by Ms Christine Lagarde, President of the European Central Bank, at the forty-third
meeting of the International Monetary and Financial Committee, Virtual IMF Spring Meetings,
Washington DC, 8 April 2021.
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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
marketbased 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
nonbank 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
climaterelated 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.