3 ECB hawks coordinate to counter Lagarde´s dovish vision

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Bankinter | Declarations by three ECB hawks (Weidmann, Bundesbank; Knot, Netherlands; and Nowotny, Austria) contrast with the dovish declarations of Lagarde, who takes over from Draghi as ECB President in October.

Weidmann, in an interview with the Frankfurter Allgemeins Sonntagszeitung: “It seems to have become a habit for people to look to central bankers and demand large scale reactions”, “… the macroeconomic data have not left me cold; there is no reason to panic”; “The question is whether new measures are needed based on our inflation expectations, above all whether the secondary effects increase and their efficiency reduces.”

Klaas Knot gave a speech in Amsterdam in which he said that “If the risks of deflation return, then I would consider the programme of debt purchases is the appropriate action, but there is not need”; “(the ECB) should keep some powder dry for future contingencies”.

Nowotny said in an interview with the Wiener Zeitung that “sometimes we should disappoint markets”; “… in recent years we may have followed market expectations too intensely and avoided disappointing the markets”. In contrast, Lagarde´s responses, collected in a document passed to the European Parliament, in which the Council sought the Parliament´s approval for her appointment, generally offer a more dovish focus, in particular: “…the ECB has an ample tool box at its disposal and should be prepared to act” and expresses her opinion that the ECB has not identified the “floor level” for interest rates, although she admits that continuing to lower them would have implications for the banking sector and financial stability.

Downward pressure on the Euro, which has fallen to 1.1035 against the dollar in recent hours. Bankinter´s analysis team has the impression that the three ECB hawks intervened deliberately and in a coordinated way to counter the dovish vision expressed by Lagarde. The ECB will meet on 12 September and is expected to further cut the deposit rate (to -0.60% from 0.40%?) and reactivate stimuli, probably through a programme of bond purchases, directed mainly at corporate bonds. The coordinated approach of Weidmann, Knot and Nowotny suggests that the opposition Lagarde will face if she wants to introduce further stimuli should not be underestimated (even though Nowotny retires in a few days, weakening the bloc of hawks). It also reduces expectations that the ECB will act vigorously on 12 September. Which is why the Euro depreciated significantly.