Wish Christine Lagarde luck, she’s going to need it, apparently.
Mario Draghi did a decent job of communicating the rationale behind the ECB’s renewed commitment to easing during his Thursday press conference, but behind the scenes, the discussion around the restart to QE was contentious.
According to Bloomberg, Bank of France Governor Francois Villeroy de Galhau took up with Klaas Knot and Jens Weidmann in opposing the resumption of asset purchases. Sabine Lautenschlaeger, Benoit Coeure and unnamed others dissented as well.
Although this is being characterized as an “unprecedented” development, it hardly comes as a surprise. Headed into Thursday’s meeting, a bevy of policymakers had been keen to express their reservations about rushing to buy more assets. Knot weighed in on August 29 just days after Weidmann warned the ECB against “acting for action’s sake”. Then Lautenschlaeger got in on the act, as did Madis Muller. Even the outgoing Ewald Nowotny said central banks should be prepared to disappoint markets when expectations run too far out ahead of policy.
So, “unprecedented”? Maybe. “Shocking”? Not really. Here’s what Draghi said during the presser:
There was more diversity of views on APP. But then, in the end, a consensus was so broad there was no need to take a vote. So the decision in the end showed a very broad consensus. As I said, there was no need to take a vote.
More important than the details of how the September meeting unfolded behind closed doors is what the dissent means for Lagarde as she steps into Draghi’s rather large shoes at a time when the European economy is faltering and inflation is half of what it was a year ago.
In written answers to a European Parliament questionnaire, Lagarde said that “the latest decisions of the ECB’s Governing Council such as its forward guidance on interest rates are in my view correctly aimed at preserving the very accommodative financing conditions for firms and households that are needed to support economic growth and ultimately, push inflation higher”.
That was before Thursday’s decision, but one imagines she would say the same thing if asked about this week’s proceedings.
When she takes the reins, she’ll ostensibly need to make the case for persisting with asset purchases, but the open-ended nature of the forward guidance in the September statement means there are only three ways out of QE: 1) inflation moves sustainably to target, 2) the program begins to bump up against the issuer limits for bond buying and officials refuse to discuss altering those limits, 3) the ECB decides to abandon the forward guidance as communicated in the September statement.
Suffice to say 1) is going to be difficult to achieve and 3) is a non-starter to the extent it would amount to an admission of failure. 2) is somewhat plausible, but one imagines the issuer caps would be adjusted in the event the economy doesn’t improve and especially if deflation comes calling.
“A lack of discussion among the ECB’s Governing Council on the issuer limits for bond buying will cap how long stimulus can go on for, helping to limit the euro’s decline”, Credit Agricole’s Valentin Marinov said Thursday, adding that “Draghi indicated there was no discussion of raising the issuer limit as a way to boost the size of the pool of assets available to buy under QE”.
For Marinov that means “So much for the infinity QE, assuming the capital key is sacrosanct”. But, again, you shouldn’t assume that – especially not in an acutely adverse economic scenario.
The point is, there’s a sense in which the burden of proof is on the data (and thereby on the hawks) when it comes to not sticking to the plan, so in that regard, Lagarde has the upper hand assuming she herself supports aggressive stimulus.
As Bloomberg goes on to admit in their coverage, this isn’t actually “unprecedented”, per se. “QE has previously proved contentious”, they write. “Draghi encountered significant opposition in 2015, when he pushed the Governing Council to start bond purchases, against the wishes of his German, Dutch, Estonian and Austrian colleagues”.
When it became clear that she had the job, we wrote that in Lagarde, “the ECB will get a seasoned political operator and something of a consensus builder”. That, we went on to suggest, “may prove especially useful going forward in the event the eurozone economy careens into a downturn, raising the stakes in contentious relationships between, for instance, Rome and Brussels”.
In addition to using her political skillset to perhaps move the needle on fiscal stimulus across the bloc and help foster trust in the institution among skeptics in countries that are predisposed to suggesting the central bank has, in the past, sought to engineer political outcomes, Lagarde will now need to ensure that internal dissent around QE doesn’t manifest itself in any overtly inflammatory public remarks from hawks, as that could serve to shake already fragile confidence in central banks at a pivotal juncture.
For what it’s worth, the euro erased its ECB losses to trade higher on Thursday.