Christine Lagarde: Monetary policy in a new environment

And this has implications for the focus of macroeconomic policy in the years to come.

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https://www.ecb.europa.eu//press/key/date/2022/html/ecb.sp221118~639420cee0.en.htmlhttps://www.ecb.europa.eu//press/key/date/2022/html/ecb.sp221118~639420cee0.en.html
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Saturday, November 26, 2022
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Summary
Key Points: 
  • And this has implications for the focus of macroeconomic policy in the years to come.
  • And in this context, swings in demand caused by the closing and reopening of the economy have hit a wall.
  • [3] And in this environment, it is uncertain whether a seamless expansion of supply will continue and how global demand will be affected.
  • For monetary policy, this changing environment creates considerable challenges.
  • That is why we have been raising rates at our fastest pace ever by 200 basis points in our last three policy meetings.
  • But we also need to normalise our other policy tools and so reinforce the impulse from our rate policy.
  • But now the environment has changed completely and we need to ensure that the lower cost of funding the TLTRO created for banks does not impede monetary transmission when policy normalisation is required.
  • Similarly, large-scale asset purchases were necessary to expand the policy stance when interest rates were close to the lower bound.
  • In parallel, our tools for preserving the orderly transmission of monetary policy notably flexible reinvestments under the pandemic emergency purchase programme and the new transmission protection instrument will remain in place.
  • Monetary policy will ensure a timely return of inflation to our medium-term target.
  • But the economic outlook will also depend on the alignment between monetary policy and other actors.
  • In the current environment of high inflation, fiscal policy needs to be temporary, targeted and tailored.
  • Looking further ahead, while monetary policy can steer demand, it cannot remove existing constraints on economic growth.
  • The effects of this shift are uncertain, but the duty of monetary policy is not.
  • But if we want to rebuild our supply capacity and strengthen domestic sources of growth, other policy areas need to refocus.
  • International Monetary Fund (2022), Near-term Macroeconomic Impact of Decarbonization Policies,
    World Economic Outlook, October.
  • Lagarde, C. (2022), Monetary policy in a high inflation environment: commitment and clarity, lecture organised by Eesti Pank and dedicated to Professor Ragnar Nurkse, Tallinn, 4 November.
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