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REUTERS NEXT-ECB's Lagarde pushes back on gloomy forecasts, sticks to recovery outlook

13 Jan 2021 / 19:10 H.

    * Lagarde says ECB's economic projections still valid

    * Projections based on lockdowns ending after Q1

    * ECB "very attentive" to exchange rate movements

    * Review conclusions, new inflation target to be communicated in one package (Adds comments on exchange rate, PEPP, strategy review)

    By Alessandra Galloni

    FRANKFURT, Jan 13 (Reuters) - European Central Bank President Christine Lagarde pushed back on Wednesday against economic pessimism, arguing that a rebound will come as pandemic uncertainty declines and that Europe possesses all the tools needed to overcome the crisis.

    Even with much of the 19-member euro area in lockdown, Lagarde continued to predict a recovery, provided that economic restrictions can be lifted from the second quarter and the bloc can overcome a "laborious" start to vaccinations.

    Only last month, the ECB cut its growth forecast to 3.9% this year but increasingly widespread curbs on movement and activity in countries including Germany and France, along with the slow rollout of vaccines, are already challenging that outlook, just two weeks into 2021.

    "I think our last projections in December are still very clearly plausible," Lagarde said in an interview at the Reuters Next conference. "Our forecast is predicated on lockdown measures until the end of the first quarter."

    The ECB said on Dec. 10 that its forecasts assumed "sufficient" levels of herd immunity would be reached before the end of 2021.

    "What would be a concern would be that after the end of March those member states still need to have lockdown measures and if, for instance, vaccination programmes were slowed down," she added.

    "VERY ATTENTIVE"

    The euro's persistent rise against the dollar also risks dampening growth and inflation but Lagarde maintained the ECB's cautious tone, despite big moves around the turn of the year.

    "We are very attentive, we will continue to being extremely attentive to the impact on prices that the exchange rates have," she said, adding that the ECB does not target any particular exchange rate level.

    Private sector economists are already cutting their growth projections, with Bank of America now predicting a 2.9% expansion - a full percentage point below its previous forecast.

    To support the euro zone, the ECB has already extended ultra-easy policy into 2022, but with borrowing costs at record lows and well into negative territory in some euro zone countries, its remaining stimulus firepower is limited.

    Lagarde said the ECB could expand its bond-buying stimulus programme again if needed, but might also refrain from using the entire 1.850 trillion euro ($2.25 trillion) envelope it has earmarked for purchases if the crisis passes.

    "If the envelope that we have agreed upon is excessive and we don't need the entire envelope, so be it," she said. "We will buy adequately in order to stick to our goal of favourable financing conditions. If more is needed, we will recalibrate."

    Lagarde also pushed back on calls for the bank to publish its new inflation target before its overarching policy review is fully completed, arguing that a "very large" group within the Governing Council is keen for a single package. The review's results are expected around mid-year.

    For more coverage from the Reuters Next conference please click here or www.reuters.com/business/reuters-next

    To watch Reuters Next live, visit https://www.reutersevents.com/events/next/register.php

    ($1 = 0.8205 euros) (Writing by Balazs Koranyi and Francesco Canepa Editing by Catherine Evans)

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