MNI BRIEF: ECB May Alter Reaction Function Leg Weights-Lagarde
MNI (LONDON) - The change of language in the European Central Bank communication last Thursday and the current uncertainty in the geopolitical environment could change the weight of the ECB’s three reaction functions “depending on the nature of shocks,” President Christine Lagarde said in a speech on Monday.
If geopolitics increase uncertainty on inflation projections “we will need to draw on other sources of data to make the risk assessment surrounding our baseline outlook more robust," she highlighted as an example, noting that if underlying trends are not impacted, confidence in ECB's forecasts will grow. (see MNI ECB WATCH: ECB Cuts 25BP, Drops Restrictive Language )
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” she said, adding the ECB is no longer in a situation where it needs to fix the policy horizon at the shortest possible transmission lag. “This change explains why we have removed the notion of “timeliness” from our monetary policy statement, focusing instead on achieving “sustainable” inflation convergence”, she added.