ECB Meeting Preview: Over to you, Ms Lagarde
The Lagarde style
Mario Draghi was a technical communicator par excellence. There was never a slip of the tongue and he reshaped and moulded the ECB by increasing the tools at his disposal and bringing more flexibility to its mandate of ‘price stability’.
Christine Lagarde on the other hand is a more unconventional choice to lead the ECB; she is not an economist and has never formulated monetary policy. It is her communication skills and diplomacy which stand out, and these may be needed more than ever as the rift between the doves and the hawks is sizeable at present, at least behind closed doors. Look out for Lagarde to err on the side of caution and continuity. Indeed, will we hear Draghi’s go-to phrase of ‘patience, persistence and prudence’?
Adverse effects of unconventional policy
Key for Lagarde will be building a consensus around the ECB’s next steps. The division in the Governing Council comes from those who see a positive impact of negative rates (Chief Economist Lane) to Italy’s Visco who believes bond purchases are more effective. This change of attitude to negative rates could well spread among other members so monitor any possible changes to Lagarde’s comments on adverse effects.
No significant changes are expected in the updated forecasts, so sticking with the gradual increase in core inflation and a tepid growth outlook. New 2022 forecasts may give some signal for future policy direction, with GDP back to potential and inflation around 1.7%. Clouds on the macro front have started to stabilise more recently, pushing inflation expectations up from all-time lows - watch to see if the introductory statement acknowledges this. That said, the ECB is firmly on hold for now and the projections should simply reinforce this.
Lagarde and the ECB is embarking on the bank’s first strategic review of its main monetary policy objectives and tools for 16 years. Any detail is unlikely, but focus will centre on hints around returning to a symmetric inflation target and whether there is a complete overhaul of the definition of ‘price stability’. This could be the next battleground between the doves and hawks – essentially, those for and against policy easing.
Continuity is likely to prevail at this meeting with the scope of the strategy review influencing markets further down the line. A focus on consensus building and watching the smooth implementation of the current easing package is the order of the day for the new President. This means EUR/USD trading in familiar ranges overall. Lagarde’s style and tone is the wild card.