Where has Christine Lagarde’s loose talk left coronavirus and monetary policy?

The European Central Bank chief’s ill-chosen words were a reminder of two truths of monetary policy, and a new truth of the present crisis.

By Tony Yates

WASHINGTON, DC - JANUARY 17: International Monetary Fund Managing Director Christine Lagarde holds a news conference at the IMF headquarters January 17, 2013 in Washington, DC. Lagarde called the conference to discuss the IMF's economic policy priorities for the coming year. (Photo by Chip Somodevilla/Getty Images)

Last week’s press conference to announce the European Central Bank’s monetary policy responses to the coronavirus crisis was dramatic for a few reasons, one being that the bank’s new president Christine Lagarde said: “We are not here to close spreads.”

What she was referring to was the spread between the yields on different EU member state government bonds. The yield is the gap between the face value of a government bond – just like an IOU – and the value it will trade for in the market. A promise by a sovereign to pay €100 in a year’s time for a government bond that sells at €95 euros, for instance, has a yield of 5 per cent. People working in finance refer to the gap between one yield and another as “the spread”.