ECB Insight: Hawkish Policy Move Likely to Be Offset by Dovish Rhetoric
7 September 2021
By David Barwick – FRANKFURT (Econostream) – For the first time in a long time, Thursday’s monetary policy meeting of the European Central Bank’s Governing Council is an occasion on which the hawkish point of view stands a decent chance of prevailing.
That is less a testament to its adherents’ persuasiveness than to the simple fact that the arguments for a reduction in monetary support have piled up too high for too long for the other side to ignore them.
And indeed, recent comments by ECB President Christine Lagarde, Vice President Luis de Guindos and Chief Economist Philip Lane appear to confirm that they have come around at least a bit, whilst the relative – and unaccustomed - silence of other doves suggests a degree of capitulation to the inevitable.
The most likely upshot of this – for hawks - unusually favourable constellation of circumstances is probably limited to a reduction of 4Q pandemic emergency purchase programme (PEPP) asset purchases on the order of between €10 and €30 billion per month.
Mere concession to reality though this may be, the doves will still exact their price. For starters, should such a deceleration be decided, Lagarde will be insistent on the point that this is not tapering, even if it ultimately amounts arithmetically to the same thing.
She can reinforce this message by stressing the ever-present possibility of a readjustment in the other direction, should conditions warrant it; reminding that the PEPP envelope volume is not set in stone; and not ruling out a potential extension of the PEPP beyond the current ending date of next March.
She may even wish to provide additional guidance about intentions to rely on the asset purchase programme (APP) down the road. Though perhaps early for details, policymakers had intended as of their July 22 meeting to make the APP an important agenda point next week, and she will certainly expect to be pressed on the point.
And of course, there is the outlook for growth and inflation, about which a certain schizophrenia may be required, given the likelihood of at least some upside revisions, in particular to the 2023 HICP projection, and the simultaneous desire to avoid appearing hawkish.
Even if, as many expect with probably good reason, euro area inflation in 2023 is forecast on Thursday to hit 1.6% and thus 0.2 point higher than previously, Lagarde may want to emphasise that this still remains well below the ECB’s symmetric 2% price stability target.
As for currently high HICP, Lagarde won’t change her tune about the temporary nature of inflationary pressures, and can add that there continues to be little sign of the second-round effects on wages that would be necessary to produce stably more robust readings.
Lagarde can also invoke the pandemic. The Delta variant has not had the economic impact some feared, but it – and potentially other mutations – contribute to ongoing heightened uncertainty. Whilst she may finally wish to provide additional insight into the question of how an end to the emergency phase would be determined, she will be at pains to make clear that the euro area is not yet there.
Surprises from the ECB are rarely of a hawkish nature, and observers should not exclude the possibility of an outcome in which PEPP purchase volumes in 4Q remain as or almost as elevated as in 3Q.
The fear of a premature withdrawal of support, a reluctance not to allow the Fed a clear headstart, or the generally uncertain environment – the ECB would not lack for excuses, at least internally, to kick the can a bit longer or arrive at some sort of unexpected compromise solution less hawkish than Econostream’s central scenario.
However, given the ECB’s own communication and own assessment of current circumstances, it would deviate from that scenario at the possible risk of its own credibility.