Economy

Lagarde warns against vaccine optimism and hints at more ECB easing

Key Points
  • "The recovery may not be linear, but rather unsteady, stop-start and contingent on the pace of vaccine rollout," she said.
  • The European Central Bank hinted last month at further monetary stimulus before the year ends.
  • Speaking Wednesday, Lagarde suggested the central bank is likely to cut borrowing costs for banks further, as well as adjusting its pandemic-related asset purchase program.
Christine Lagarde, President of the European Central Bank, speaks to the media following a meeting of the ECB governing board.
Thomas Lohnes

LONDON — European Central Bank President Christine Lagarde cautioned Wednesday against an immediate economic impact from a Covid-19 vaccine, while also giving more details about what the central bank is likely to do next.

"While the latest news on a vaccine looks encouraging, we could still face recurring cycles of accelerating viral spread and tightening restrictions until widespread immunity is achieved," Lagarde said at the ECB Forum on Central Banking.

"So the recovery may not be linear, but rather unsteady, stop-start and contingent on the pace of vaccine rollout," she said.

Pfizer and BioNTech announced Monday that their Covid-19 vaccine was more than 90% effective in preventing the infectious disease, which has boosted optimism that the pandemic could come to an end sooner rather than later.

Speaking to CNBC Wednesday, ECB Governing Council Member Klaas Knot said: "Having a vaccine is absolutely good news but the materialization of the economic impact of the good news may take some time and will not happen over night."

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"Mass vaccination will take a significant amount of time and that means that the economic outlook for 2021 will continue to be bumpy for a long time until finally these sorts of benign effects of the vaccine will become fully available," he added.

The euro zone grew by 12.7% in the third quarter of the year from the previous three-month period, preliminary data showed last month. The surge in economic activity was the sharpest-ever on record, following the second-quarter's historic plunge, and came as social restrictions eased across the bloc.

However, since September, governments have stepped up measures to contain a second wave of Covid-19 infections. France and Germany, the two largest euro economies, are currently in national lockdown, for example.

What changes in December?

The European Central Bank hinted last month at further monetary stimulus before the year ends. At the time, the central bank kept is policy unchanged but said that there could be a "recalibration" in December based on upcoming data.

Speaking Wednesday, Lagarde suggested the central bank is likely to cut borrowing costs for banks further, as well as adjusting its pandemic-related asset purchase program.

"In the weeks to come we will have more information on which to base our decision about this recalibration, including more evidence on the success of the new lockdown measures in containing the virus, a new set of macroeconomic projections and more clarity on fiscal plans and the prospects for vaccine rollouts," she said.

"While all options are on the table, the PEPP (Pandemic Emergency Purchase Program) and TLTROs (targeted longer-term refinancing operations) have proven their effectiveness in the current environment and can be dynamically adjusted to react to how the pandemic evolves. They are therefore likely to remain the main tools for adjusting our monetary policy," Lagarde also said.

Her remarks come mostly in line with analysts' expectations ahead of the December meeting. At the moment, analysts believe that further rate cuts are "unlikely," but ECB's Knot did not exclude that possibility.

When asked about the possibility of cutting interest rates even further, he said: "We wouldn't want to exclude any measure going into December."

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