JP Marín-Arrese | Christine Lagarde’s nomination ensures the ECB will fully preserve Draghi’s heritage. It will certainly deliver a substantive loosening in monetary policy over the coming months. Everyone expects the first move to materialise this week, probably a rate cut. Anything short of a clear message in the coming press conference would deeply disappoint the markets. Whatever happens next Thursday, more robust action will materialise before the year close.
The room of manoeuvre for cutting rates seems too narrow for exerting a sustainable influence on credit conditions. Only the lending rate offers some limited scope for reduction, slightly narrowing the channel for interbank money price. Too little for the kind of sweeping change Draghi wants to deliver. Reverting to fresh bond-buying seems the only sensible option. As the ECB will trigger massive targeted lending to the banking system in September, implementing the asset-buying tool could be held as a backstop for reinvigorating the economy should it fail to react to the other measures.
The whole issue lies in how much this loosening will influence the ailing economic performance. As the current weakness mainly derives from uncertainties in global trade, shaken by the ruthless manners shown by the White House, one doubts monetary expansion can revert the mounting lack of confidence. Firing all the rounds right now could deplete the Central Bank’ gunpowder reserves when more pressing needs likely emerge in future. Thus, while strong words from Draghi are very much welcome, he should refrain from hastily using all the ECB arsenal all too soon.