ECB Council member Fabio Panetta articulated a sense of urgency for ECB to loosen its approach, suggesting that “the time for a reversal of the monetary policy stance is fast approaching.”

Panetta advocates for a nuanced evaluation of the timing and methodology of interest rate adjustments, contrasting the implications of initiating “quickly and gradually” against opting for “later and more aggressive” measures. He warns that the latter could “increase volatility in financial markets and economic activity”.

The backdrop to Panetta’s remarks is a macroeconomic conditions characterized by significant disinflationary progress at an “advanced stage”, with progress toward 2% target “continues to be rapid.

He emphasizes the absence of any “upward de-anchoring of inflation expectations,” pointing instead to emerging downside risks. This observation effectively counters concerns over enduring high core inflation, which Panetta now deems “groundless.”

The crux of Panetta’s argument lies in the potential consequences of delayed policy adaptation. “If monetary policy were to take too long to accompany the ongoing disinflation, downside risks to inflation could emerge that would conflict with the symmetrical nature of the objective set by the ECB’s Governing Council,” he said.

ECB President Christine Lagarde said in a speech that the “high inflation environment” is a big challenge facing Europe. And, that’s “the challenge that concerns me the most”.

“We must bring inflation down. And we will deliver on this goal,” she emphasized. “We have made it clear that ECB interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive, and stay at those levels for as long as necessary.”

“In other words, we will stay the course to ensure the timely return of inflation to our target.”

Another challenge Lagarde named is to “best protect Europe’s critical interests… as the next chapter in the globalisation story is being written”. Europe must be “prepared for a future in which the global economy could fragment”, and “develop more our own sources of growth.”

Full speech here.

ECB Chief Economist Philip Lane said in a speech there is “considerable uncertainty about pandemic dynamics. Recent intensification in some countries represents a “significant downside risk” and requires “prolongation of various fiscal support measures”.

But, “the launch of vaccination campaigns is a milestone in the eventual resolution of the pandemic health crisis, even if there is only cloudy visibility of the calendar towards sufficient immunity to enable the restoration of normal economic activity,” he added.

Under these conditions, standard Poole analysis calls for a “two-sided and flexible approach” to the total scale of PEPP. “If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.”

Full speech here.