The Mario Draghi era is over. Thursday will feature the first European Central Bank decision with Christine Lagarde as president.
No fireworks are expected as Christine Lagarde on Thursday runs her first European Central Bank meeting since taking over as president from Mario Draghi.
But even without interest-rate changes, the first meeting will be closely watched for clues as to how the Lagarde era at the ECB will differ from that of her predecessor who never once lifted interest rates.
The ECB decision comes at 7:45 a.m. Eastern (13:45 Central European time) on Thursday, followed by the Lagarde press conference at 8:30 a.m.
Here’s what analysts are saying.
|Bank of America
|The highlight of the ECB meeting this week could be the start date for the strategy review, without much news on timeline or content. The juice will be in the likely upward revisions to core inflation forecasts. That will matter for 2020. We stick to our view: the strategy review, doubts over “QE infinity” and the reversal rate debate make for a volatile 2020.
|All key interest rates will likely be left unchanged, and the forward guidance reaffirmed. The main interest at this meeting will be the new Eurosystem staff projections, extended to 2022, to gauge whether the September package will be sufficient to bring inflation back into line with the ECB’s target over the forecast horizon. If not, investors’ attention will quickly turn to the ECB’s toolbox and what instruments the Governing Council would be willing to use and when, in order to defend its credibility in the absence of large fiscal support. The upcoming strategic review of monetary policy will also likely be the focus of many questions.
|We expect no material changes to the staff projections and no major changes to the press release and introductory statement inherited from Draghi. Lagarde’s Q&A style will likely be accessibly clear and big picture rather than intellectually precise and deeply educational in terms of the underlying economic analysis: more [Jerome] Powell than [Janet] Yellen / Draghi.
High Frequency Economics
|The uncomfortable truth is that President Lagarde has not revealed a single clue about any substantive changes to the setting of monetary conditions in the eurozone under her presidency. She may announce radical changes to the course Mario Draghi set, or she may not announce any changes at all.
|The ECB also shows no sign of additional action, despite little prospect for fiscal support and updated staff forecasts likely to show core inflation only reaching 1.6% yoy by 2022 even after the September package. Instead, attention has shifted to a broader policy strategy review and away from Draghi’s attempted focus on the credibility of its inflation commitment—potentially distracting the ECB as it checks its tools. This review could be officially launched next week and may not be completed before mid-2020. Thus, Lagarde’s first press conference will be important given the lack of clarity in direction.
|The ECB is meeting on Thursday with Christine Lagarde for the first time as her head, without the review of policy being completed. She has stated her intention to move to a green deal in line with the EU commission and with opposition from Jens Weidmann. What the ECB can do is change the composition of QE to increase Credit Easing targeting green bonds and covered bonds as a signal. They are also quite likely to review the rules on negative deposit rates so that the effective rates is less negative in a give to the hawks and a recognition that Bund yields are low enough. What the ECB could do also is to widen its credit spectrum when purchasing bonds. That could include infrastructure and others that are necessary to improve both Green objectives and EU wide ones such as increasing productivity in cooperation with the EIB.
|Another reason we expect no change in policy accommodation is that policy makers have not sent a clear enough signal to the market that a rate cut is imminent. ECB President Lagarde has had plenty of opportunities over the past few weeks to signal a December rate cut, in addition to Chief Economist Philip Lane, but neither has convincingly expressed clear signals for such action (the market-implied probability of a 10 bps ECB rate cut is essentially zero). Lastly, it make sense to us, that officials find value in holding policy steady for an extended period after the ECB announced such a substantial package of easing measures in September (a 10-bps rate cut, renewed asset purchases, more favorable terms on long-term funding for commercial banks and a tiering system for bank reserves). We understand that the central bank may want to lend more time to allow this package of easing measures to works its way through the economy. While we join the consensus in expecting no change this week, we expect the ECB to cut the deposit rate by 10 bps in March 2020.
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