Christine Lagarde gave her press conference as the head of the ECB yesterday. While alerting of the risks that the eurozone is facing, she promised to maintain both the official rates and the monetary stimuli of her predecessor Mario Draghi. However, the market’s focus was on the announcement of a broad “strategic review” of the ECB’s monetary policy, the first since 2003. This was interpreted as a possible change in the ECB targets, including inflation below 2%. Banks bounced with over + 3%.
ECB monetary policy
Caixabank Research | After a September full of announcements, the next ECB meeting (24 October) will be transitional, in one sense at least: 31 October will see the end of Mario Draghi´s mandate, the most charismatic president in the institution´s history.
Gilles Moëc (AXA Group) | We knew that the European Central Bank (ECB) was very divided in the run-up to the Governing Council meeting on September 12th, but two weeks later the fallout of what must have been a very fractious discussion is still very much here.
Joachim Fels (PIMCO) | By cutting the deposit rate to -50 basis points, extending forward guidance, introducing a two-tiered system for excess reserves that mitigates the adverse impact of negative rates on bank profitability, and resuming open-ended net asset purchases of EUR 20 billion per month, the European Central Bank (ECB) recently provided clarity about its prospective monetary policy stance for the foreseeable future and thus well beyond the change in leadership from Mario Draghi to Christine Lagarde that takes place at the end of October.
J. P. Marín-Arrese | Against all odds, Draghi has secured consensus over his stimuli package by a cunny trade-off between the subdued intensity of individual measures in exchange of ample coverage. His brilliant brinkmanship as Chair of the ECB facilitates the task of his successor as Ms Lagarde can wait-and-see comfortably cushioned by a strong and comprehensive arsenal relieving her of the need to change course for many months to come.
A soft landing is the Holy Grail of central bankers. The glory that accrues from avoiding the economic costs of a recession by skilful manipulation of interest rates. But do such efforts to avoid, or mitigate, recessions simply store up trouble for the future? Does seeking to avoid a recession simply lead to a worse recession in the future?
Low growth below the 2% threshold coupled with below-target inflation has led our macros to believe that the ECB is taking extra stimulus for granted. This would mean the return of the centra banks’ asset repurchase program, experts at Morgan Stanley point out..
David F. Lafferty (Natixis) | Christine Lagarde’s appointment was somewhat of surprise where few economists predicted her to take the helm of the ECB. This gives some indication of how complex the negotiations were for the new EC governing positions.
“Beyond our scepticism about the ability of new stimulus measures to drive the economy, we recognise that the ECB is obliged to act which will create a situation unfavourable for its inflation targets,” analysts at Intermoney point out. In this scenario, we consider that the reactivation of asset purchases with certain adjustments (based on the reality of German debt) would be the measure with the greatest positive impact, more so than interest rate cuts. Nevertheless, if the second path is explored, it would be accompanied by measures to mitigate the effect of negative rates on the banking sector.
The European Central Bank will have to relax its monetary policy again, possibly through further reductions in interest rates or the purchase of assets, if inflation in the eurozone does not meet its target. Chairman Mario Draghi underlined that the ECB’s the limits are flexible because the its legal powers allow it to deploy tools that are both “necessary and proportionate”.