At the ECB, Preparing to Underwhelm in December?

6 November 2020

By David Barwick – FRANKFURT (EconoStream) – With the December monetary policy meeting of the European Central Bank still more than a month off, the ECB has plenty of time yet to prepare itself - and financial markets - to make good on President Christine Lagarde’s promise to ‘recalibrate’ the policy stance. So far, there is little indication that the Governing Council is planning to over-deliver.

One good reason for the pronounced lack of specificity to date is that the information that the ECB has indicated would be key to any decision is simply not yet available. Most notably, according to Lagarde last week, this includes the staff macroeconomic forecasts. These are to be updated in December and as of today will not be at policymakers’ disposal for weeks to come.

In her introductory statement at the time, Lagarde also cited the pandemic - in particular prospects for a vaccine – along with exchange rate developments as being important to the ECB’s recalibration plans. To that list, she later added ‘the fiscal responses that will be also laid out in order to respond to the circumstances’.

These have been recurring themes in the public comments of various central bankers during the last week. They also have a bearing on the outlook for growth and the medium-term inflation prospects that are crucial for the ECB. In that sense, it is understandable that monetary authorities need to a degree to wait and see what the coming weeks bring. But whatever the instruments to be relied on and the size of the measures, the prevailing tone in the meanwhile seems oddly inconsistent with an intention to do all that much.

In the only Executive Board interview since October 29, Isabel Schnabel said hardly a word to German business daily Handelsblatt about what the ECB might do or why indeed it needed to do anything. To the contrary, the text published on Tuesday led with her assurance that the economic effects of the containment measures ‘are likely to be less pronounced this time, because the lockdown is more targeted.’

The public health measures are ‘a hard blow to the services sector, but manufacturing is not being shut down and is benefiting from China’s strong recovery’, she said. She reminded that 3Q growth had been ‘surprisingly good’; as to the economic weakening the ECB is presumably going to redress on December 10, all that she had to say was that the current quarter ‘will likely see a marked decline in growth’.

Pressed clearly on just what the ECB might do next month, she offered a somewhat banal response that again seemed better suited to explaining why the ECB might not need to do much of anything:

‘Before every monetary policy decision we ask ourselves which measures would be the most appropriate in the given situation’, she said. ‘The current situation differs from that in March and that will presumably be reflected in the calibration of the instruments. The main concern at that time was to stabilise financial markets. By contrast, today’s financing conditions are very favourable in historical comparison.’

Schnabel did not stray from those messages in a speech on Wednesday, affirming merely that the new staff projections would be relevant, inasmuch as these would ‘offer a first tentative assessment of how persistent the economic effects of the new containment measures are likely to be’.

The idea that those effects might not be all that persistent resurfaced when she asserted that the resurgence of Covid-19 had ‘visibly skewed the risks to the economic outlook for the fourth quarter of 2020 to the downside.’

Schnabel was also keen once again to make clear that this is not last March. ‘Most notably’, she said, the current containment measures’ financial market impact has been ‘much more localised’, with markets working smoothly and ‘no signs of fragmentation’.

‘Quite on the contrary,’ she continued, sovereign debt markets reflect the ECB’s accommodative stance, with the GDP-weighted sovereign yield curve well under the level prior to the pandemic.

Her colleague Yves Mersch, whose meeting with private bankers on the policy outlook gave him the ideal venue the day after the Governing Council’s monetary policy meeting, hardly gave his listeners more reason to think big. He was asked what the unanimity invoked by Lagarde had been about and whether he saw a risk of the ECB stoking expectations it would wind up disappointing.

‘There was unanimity insofar as everyone agreed that we are facing high uncertainty’, he said in response – a comment he could have safely made a week or month previously.

Like Schnabel, Mersch waxed enthusiastic about recent growth, observing that 3Q GDP – since then reported at 12.7% on the quarter – could hit double digits. And while conceding that with the increase in Covid-19 case numbers, ‘the situation has suddenly taken a turn for the worse’, he, too, was at pains to note that the current lockdown scenario is not comparable to that of the spring.

‘But we signalled that we are ready to look at our toolbox, to recalibrate or to rectify or to adjust – whatever term you want to use – all our instruments in order to take into account the new situation’, he said. ‘And we are all in agreement that in the new situation we need to recalibrate what we have been doing, and recalibration also means assessing the efficiency of the instruments in the new circumstances.’

Such a response looks more like buying time than it does like an answer to the question of whether the ECB might under-deliver. Nor did he revisit the question, noting instead that ‘we also need to take into account the additional fiscal support that is being discussed and decided upon every day in the member states.’ Fiscal policy, he said, ‘seems most appropriate because of the issues on the demand side, of consumers being affected … especially also if there is an increase in unemployment.’

As noted, the ECB has another five weeks to beat a path forward, though it may want to provide more guidance before the quiet period starts in four weeks. If not too soon for the committees tasked with threshing out a plan, a notable opportunity for relevant communication will be during the ECB Forum on Central Banking on Wednesday and Thursday of next week, when an array of Executive Board members will be speaking.

It may well be that the ECB puts that opportunity to use, at least to the extent of providing more specific guidance about what tools it sees as most appropriate, rather than simply insisting that all tools – and maybe new tools - are fair game.

Surely the ECB knew on October 29 that it was effectively inviting financial markets to fantasise about all the things Lagarde might have for them on December 10. Hoping that salvation in the form of a reliable vaccine and vast fiscal policy measures will so soon allow the ECB to avoid stepping up to the plate could scarcely have been the plan.

Still, those left last Thursday with the idea that the Governing Council is chafing at the bit to unleash its firepower next month might not want to get their hopes too high yet.