Interview with Christine Lagarde, President of the ECB, conducted M.C. Govardhana Rangan on 24 February 2023
27 February 2023
A generation of central bankers did not bother about inflation at all. For a year now that seems to be the only issue. What went wrong?
My predecessors and many central bankers around the world had to fight deflation, and they had to adjust policy as a result of that. More recently, we saw prices rise. And that was largely as a result of higher energy prices and supply bottlenecks. Many of us assumed that it would be transitory as is often the case with supply-driven shocks. But then came the war in Ukraine, and the rarification of supply of oil and gas and the price increases that we witnessed.
So the war changed everything…
We went from COVID lock down with reduced activity to the reopening of the economy. You suddenly wanted to go to the restaurant or to the bar with friends. There was a surge in demand which was met by restrained supply.
Interest rates need to rise to fight inflation, but the magnitude of the increases became a surprise. How long will this have to go on for?
We had to take prompt and significant measures. In December 2021, we announced that we were going to stop our pandemic-related net asset purchases. Since July, we have hiked interest rates at a pace and size that is unprecedented. Interest rates are the most efficient tool in the present circumstances. There is every reason to believe that we will do another 50 basis points in March. After that, we will see. We are data dependent.
So the pace of increases could slow?
We will do more hikes if necessary to return inflation to our target of 2% in a timely manner. It will take what it will take. What I know is that we will return inflation to 2%. And we want to not only return it to 2%, but to keep it there sustainably.
There is always a trade-off between inflation and growth. The market is factoring in a recession and a possible easing by central banks sooner rather than later. What is your reading?
I don’t have a timeline. I have an objective, which is our target. We need to raise interest rates to a level that is sufficiently restrictive to return inflation to 2%, and to keep rates there for as long as necessary to be confident that inflation returns to 2% in a timely manner. That’s the mantra. Hiking rates inevitably dampens demand. And what we’re trying to do is to adjust demand. That’s the mechanical impact that we expect from what we are doing. But as I said, it’s going to be data dependent. We will assess at every meeting, and we will decide meeting by meeting what we do.
Rate increases have an impact on financial markets. In a 2015 speech as International Monetary Fund Managing Director you warned about the consequences of the lift off of interest rates. What impact is this tightening going to have? It affected bank earnings last quarter.
In order to fight inflation, we want that our interest hikes are passed through to the financial sector, including to banks. My hope is, because we want monetary transmission to be channelled through the economy, that banks will also reflect those interest rate hikes in their remuneration of deposits. Because that really should take place.
This is coupled with the draining of liquidity. We have seen instances like freezing of withdrawals, wobbly banks and shadow banks. What impact would falling liquidity have, and how well prepared are we if another crisis were to emerge? What are the risks of tighter liquidity in financial markets?
First of all, the banking system is a lot stronger – the capital ratios, the liquidity ratios, the leverage – all of that has significantly improved. We are going to only partially reinvest the redemptions from our asset purchase programme APP as of March, which will effectively reduce the footprint of the ECB in financial markets. But we’re doing that at a measured pace. Our reinvestments will decline by 15 billion euros per month on average until the end of June 2023. It’s measured, it’s predictable, it’s transparent. Markets know what to expect. They can prepare for that, and I think that they do so.
It’s one year since war in Ukraine began. What are your thoughts on where it is headed and its impact on the global economy?
Today [24 February] is the anniversary of this horrible invasion by Russia of Ukraine with no justification and no valid reason. We can only have sorrow, sadness, and horror when we see what is going on in Ukraine. Mr. Putin’s attempt to unsettle, disorganise and divide the Europeans has been a complete failure. Because the Europeans stuck together. NATO was reinforced. We found alternative sources of energy. We have significantly reduced our dependence on both gas and oil coming from Russia, and Ukraine is stronger. From those points of view, it has not been a success for Mr. Putin. And if anything, the Europeans have demonstrated solidarity amongst themselves. And they are demonstrating solidarity with Ukraine to help the country protect its territory.
But the reaction from across the world to Russia’s war hasn’t been the same when we look at sanctions. What does this mean for the global economic order?
It is natural for countries to protect their territory. I wouldn’t want my country to be invaded, you wouldn’t want your country to be invaded. We want to protect the territorial integrity of all nations. There is no reason that this principle should not be respected. The $60 price setting for a barrel of oil has been a good measure. Those who purchase oil from Russia have benefited. But I would hope that people think about what it means. What if a neighbouring country suddenly invaded for no valid reason? I know some countries are watching and do not like the situation, but they don’t like to take sides either. But we should reflect on the principles that are being violated here and why we are not using the multilateral framework and rules anymore.
Coming to the multilateral framework, the World Trade Organisation’s (WTO) relevance appears to be declining with regional trading blocs becoming the order of the day. What’s the future of global trade that was the cornerstone for decades?
Wasn’t it a very good Indian economist who said that the trade system was like a spaghetti bowl? It used to be like that 20 years ago and to a certain extent it still is as we still have a subset of regional trade arrangements. But the WTO under the leadership of Ngozi Okonjo-Iweala has made progress. They managed to reach agreement on fisheries subsidies. I’ve been Minister of Agriculture and Fisheries and I know it is really hard. And if she has managed to get an agreement on fisheries subsidies at the WTO, I’m not losing hope in the WTO.
The sparring between the United States and China that began with Mr. Trump accusing China of stealing intellectual property and spying is only deteriorating. How do you see this playing out for global trade?
When it comes to trade and the global economy, I hope that we don’t see a decoupling either in trade or in technology that would damage the benefits that we can draw from trade. And that would undo what we have achieved over the last decade. I strongly believe in a trade and economic system that is based on rules, and not based on whoever has the strongest arm to defend himself. When I was a young lawyer, there were countries that were considered to be the intellectual property infringers. And today, they are the most active intellectual property propagandists. The wheel turns.
In 2015, after meeting Prime Minister Modi and the late Finance Minister Arun Jaitley you said ‘the new government is skilfully shifting the focus to good macroeconomic management, clean and efficient government and inclusive development.’ Eight years later what is your assessment of India?
I haven’t studied Indian economics as much and as deeply as I did at that time because it’s no longer my job. But when I look at Indian economic data, it’s a country that has done much better than others around the world. If you look at the GDP figures, if you look at unemployment, which has increased but not in dramatic ways, I would say that there has been continued progress.
What do you expect in the coming days and years?
I see the Indian G-20 presidency as a fantastic opportunity for India to draw on its own experience in the field of digitalisation, digital currency, regulatory environment for cryptocurrencies and to push that agenda on a universal basis to bring some sanity into this particular sector. India has been at it for a long time. I think that India has great experience. Both the minister and the central bank governor have put that on the agenda and I hope they will really push it. I think it’s critically important that it is done by a country like India. Another topic to push is the international financial architecture, the repurposing of the development banks, the World Bank, the International Monetary Fund. India is legitimate in pushing for this.
What makes you believe that India could deliver when financial developments like these in the past mostly originated in the West?
Because I think that there is massive transformation. Everything is moving to digital. It could be that if you asked ChatGPT, it could draft this interview. Everything is now moving in a digital era with artificial intelligence and mining of massive amounts of data. India has huge expertise and is ahead of the game in many ways. The way in which you came up with the individual identification (Aadhaar) is a case in point. Nandan Nilekani was a pioneer, who inspired the world with his mechanism. It was copied and inspired many corners of the world.
There is a stand-off between the Indian and European market regulators on inspection of financial institutions here. It is threatening to lock out European banks from Indian markets. How does it get resolved? Don’t we need each other at the end of the day?
We all need each other at the end of the day. I stick to my principles. I believe in the rule of law. I believe in inclusiveness. And I think that solutions have to be worked out between reasonable people who believe in these same principles. But I don’t want to take a stand on this particular issue, because it’s not my call.
Can that be resolved? During the Greek crisis you used a phrase that became the title of a book by the former Greek finance minister Yanis Varoufakis?
`Adults in the room.’ We always need good adults in the room.
While monetary policy has been rational, the fiscal side in many countries has been weak. How does that play out?
The general principle in the current circumstance is that fiscal and monetary policy should not work at cross purposes. Because if fiscal is too expansionary, stimulates too much, monetary policy is going to have to tighten more than it otherwise would. So there has to be good coordination. We’re trying to get it to work that way in Europe. In Europe, it’s a lot more difficult – we have one central bank and 20 fiscal authorities.
How much does the fiscal side have to move to make monetary policies effective?
We need to focus on the quality of the fiscal response. We are telling governments that they should make sure that their fiscal support is temporary. If, for instance, a government supports people because of high energy prices, then if energy prices come down, the support should be reduced. Governments should target their support at people who need it most. And it should be done in such a way that people still have an incentive to reduce their energy consumption. So, temporary, targeted, and tailored. Those are the three key principles.
Russia’s invasion of Ukraine changed a lot. Climate change is close to your heart. Has it been put on the back burner with many countries going back to coal?
The instant reaction to the war and to the blackmail on energy by Mr. Putin has been counterproductive from a climate change point of view, because some countries just had to revert to coal. But I am hopeful that in the medium term it will be positive. Because it has given us the awareness that we cannot be dependent on fossil fuel suppliers. And when you look at the speed at which some countries are now moving into renewable sources of energy, it has accelerated, and it will continue to accelerate.
There’s a lot more action on diversity and gender equality. Has enough been done?
Societies have moved. When I look at my grandmother, my mother, myself, and my daughters-in-law, there is a continuum. But it’s laborious, it’s not over. And it requires various things. One is learning. The education of young girls is fundamentally important. The second is law. There are countries where a large part of the legislation is still discriminating against women. And there are countries that have made a point of eliminating all discrimination. I was Minister of Finance when a law was voted in by the French parliament that required at least 30% of board members of publicly quoted companies to be women. Suddenly companies, which earlier said they could not find competent women who wanted to serve on their boards, realised they existed. The third element is empowering young girls and women to develop their talent. They have to be in parliament, in government, participate in the corporate world.
Many youngsters aspire to careers in finance. You are a trained lawyer. How did you end up at the top of the financial world? What are the learnings?
You hit the nail on the head: it’s about learning. Careers are not linear anymore. They used to be, not anymore. When you look at your daughters, when I look at my sons, they know that they’re going to change jobs. And they know they’re going to have to learn along the way. That’s what I did as well. I was lucky to have had good educational training to begin with. I studied law, but I also studied economics, and I studied political science. And after having been a lawyer for 20 years, I moved into trade, and trade was a very good introduction to economics. I had to learn and learn and work hard. One always has to be curious, challenging those who know.
