ECB Set for Relatively Muted Meeting as Euro Area Crosses ‘Bridge’

20 January 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank can look forward on Thursday to what could be one of the least eventful Governing Council monetary policy meetings since the outbreak of the pandemic a year ago.

Following the array of measures agreed at their December 10 gathering, monetary authorities are not only unlikely to see an immediate need for further action, but probably also do not anticipate any such need in the near future for which they would have to lay the groundwork now.

Europe’s central bankers face no significant expectations to the contrary on the part of financial markets. Moreover, the staff macroeconomic forecasts on which the Council prefers to base its moves, having been updated six weeks earlier, will not be revised again until the March meeting, and appear to be considered intact for now.

Nonetheless, Council members have much to discuss. With respect to the impact of their latest policy steps and their policy stance in general, satisfaction will probably be the dominant sentiment. Further bright spots include the 11th-hour resolution of Brexit, the two final U.S. Senate elections and the keenly anticipated handover of the U.S. presidency. These all take downside risks off the table, though any joy will be tempered by the emergence of Italian political instability.

On the other hand, against the backdrop of particularly virulent Coronavirus mutations, the evolution of the pandemic will continue to provide clear cause for concern. Countries across Europe are extending or intensifying measures to contain the spread, and health systems are under great strain. This increases risks to the economic outlook in the near term.

In addition, the rollout of vaccines – on which policymakers have been pinning their hopes – has proceeded more slowly than intended in many countries, including major member states. Moreover, some countries now face disappointment following a significant, albeit presumably only short-term reduction in the pace of shipments by one key vaccine maker.

It is thus a given that President Christine Lagarde, who will recall that markets were somewhat underwhelmed by the December 10 decisions, will reassure listeners at the post-meeting press conference that the ECB stands ready to do more if warranted. That message seems apt to receive more emphasis than its obverse.

At the same time, an overly dovish attitude would not be consistent with her own bullish comments from just last week, when she asserted with reference to the ECB’s projection of 3.9% growth this year that she had ‘no reasons to believe our forecast is wrong at this point in time.’ She added that ‘we start on a more positive basis than some would like to look at.’

With respect to inflation, the ECB’s prediction of a rebound to 1.0% HICP this year could even turn out - for a change - to undershoot the final outcome. As Executive Board member Isabel Schnabel observed eight days ago, the downside impact of the pandemic on inflation will dissipate this year in the wake of the reversal of the German VAT reduction and a rebound in energy prices.

And then there is the euro. In dollar terms, the common currency as of Wednesday is essentially at the same level as on December 9, the day the Governing Council started its last monetary policy deliberations. This approximate parity, however, reflects the euro’s weakening from higher levels that prevailed just last week.

Monetary authorities are keenly aware of the potential for renewed strengthening of the euro, and in somewhat starker language than hitherto, Lagarde insisted last week that the ECB would ‘continue to be extremely attentive to the impact on prices that exchange rates have’. That attitude seems likely to be on display on Thursday.

But overall, she will probably defer any indications of what else could come from the Eurotower, rather than feed markets seen as always hungry for more. As usual in the aftermath of significant policy action, the next steps also require additional information. Indeed, Lagarde last week also said, ‘What would be a concern would be that after the end of March, those member states still need to have lockdown measures and if, for instance, vaccination programs were slowed down.’

‘After the end of March’ would also be after the Council’s March meeting, giving a potential insight into the minimum period over which, barring unforeseen developments, monetary policy is probably on hold as previous measures work through the economy and other pieces of data fall into place.

As Lagarde may put it on Thursday, the euro area is now traversing a bridge across the pandemic. Where exactly it is on the bridge and how long the bridge will need to be, are open questions, leaving her and the rest of the Council in wait-and-see mode for now.