Lagarde Era Begins At ECB

The ECB kept policy on hold in December, as expected, but that’s not really the highlight.

Thursday is the day when Christine Lagarde steps into Mario Draghi’s shoes for the first time during a post-meeting press conference. Effectively, this marks the beginning of the Lagarde era.

“We see the ECB’s acrobatic skills taking centre stage next year — not [this] week”, BofA said, previewing today’s proceedings, adding that “the December meeting will be an easy one [characterized by] extremely careful communication from Lagarde”. The hard part comes later, the bank suggests.

Two months on from the Governing Council’s controversial decision to restart net asset purchases as part of a broad package of easing measures delivered just in time for Mario Draghi to ride off into the sunset, the outlook in the euro-area is still tenuous, although it’s arguably improved at the margins.


Minutes from the October meeting showed policymakers emphasizing the importance of unity following what was widely seen as the most contentious meeting of Draghi’s tenure in September, when multiple officials argued against the resumption of net asset purchases.

Lagarde may talk up an expected strategy review on Thursday. Inflation remains a country mile away from the central bank’s target and recent upticks could prove fleeting.

According to officials cited by Bloomberg late last month, policymakers are considering a tweak to the target to make it just 2%, as opposed to “below, but close to, 2%”, an ambiguous goal that’s somewhat confusing at times.

It would be the first serious rethink in more than a decade and a half. In addition to ensuring there will be no calls for policy normalization should inflation move sustainably above 1.5%, a new, more definitive commitment to 2% could bolster expectations which, of course, are generally seen as self-fulfilling.

On Goldman’s view, Lagarde will signal a “‘wait and see’ approach, while emphasizing that room for easing (including rate cuts) remains if the outlook deteriorates”. She’ll also likely “note that negative interest rates have, on net, been effective but also expect a clear acknowledgment of their adverse side effects”, the bank says.

You can probably expect plenty of exhortations for fiscal stimulus from Lagarde too. After all, pretensions to being willing and able to “do more” notwithstanding, the dreaded “reversal rate” is probably somewhere not far below where the policy rate current sits, and we seem to have reached the point of diminishing returns on asset purchases a long time ago.

Full December statement

12 December 2019

At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

On 1 November net purchases were restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.


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