ECB Insight: Sparse Recent Communication Sets Stage for Mostly Restrained Presser

26 October 2021

By David Barwick – FRANKFURT (Econostream) – Rare is the Governing Council meeting of the European Central Bank that is preceded by as thin a trickle of communication from the Executive Board as the gathering this week.


Aside from ECB President Christine Lagarde’s comments during the IMF Annual Meetings less than two weeks ago, in which she hardly broke new ground, weeks have passed since the last meaningful Executive Board speech delving into monetary policy, and more than a month since the last interview.


The reticence is well founded. On the one hand, monetary authorities are simply unsure what they are facing in terms of inflation, but also even growth, given the potential of unexpectedly protracted supply constraints and high energy prices to impact economic prospects. To the limited extent there has been recent communication, it has been consistent with this uncertainty.


At the same time, communication doesn’t help the ECB’s cause and in particular that of Lagarde as she labours to manoeuvre the other 25 members towards a December consensus that bridges obviously highly divergent viewpoints. For example, Lagarde herself, by no means at an extreme of the spectrum of monetary policy philosophies, only nine days ago said that the end of the pandemic emergency was 'drawing closer', while the next day, Council member Pablo Hernández de Cos affirmed that ‘the crisis is far from over'.


Above all for the latter reason, Lagarde may not be too forthcoming during the press conference about progress towards the decisions awaiting on December 16. She may however offer a qualitative update of inflation prospects, which is poised to be a key and possibly contentious topic of the meeting. As Council member Edward Scicluna told Econostream in a recent interview, he ‘would see the governors coming [to the meeting] with increased concern about inflation.’


But as we wrote last time around, Lagarde won’t fundamentally change her tune about the temporary nature of inflation developments, 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.


Econostream subscribes to the dominant view that Lagarde will also take the opportunity to push back against market developments that imply relatively early policy tightening and thus run counter to the ECB’s formal forward guidance. Indeed, it is almost unthinkable that she would not want to do so, and probably forcefully, as anything else would only fuel further wholly unwanted speculation. We thus see potential for her to be surprisingly dovish in this respect.


But as noted, she is more likely to be tight-lipped about current thinking on asset purchases. To be sure, we still take the view that a possible compromise outcome could be to extend the PEPP at a yet slower purchase pace than that of 4Q and, presumably, of 1Q, for the three to six months it would then still take to exhaust the envelope, even if on balance we assume the PEPP will end in March. Either way, tipping her hand 49 days before she needs to announce specifics just wouldn’t be consistent with her well-established preference for playing for time and not being open to ‘totally premature’ discussions.


We have no doubt in any case that the ECB will make substantial inroads in this regard. As one meeting participant told Econostream recently, this week’s gathering can be expected to be dominated by seminars and discussions about what is feasible with respect to the asset purchase programmes. That could prove ‘a bit more exciting’ compared to the official part of the Council meeting, which he suggested would be ‘quite boring’.


We suspect as well that there could be some discussion, at least internally, about where things stand as far as the crisis phase of the pandemic goes. If asked about this during the press conference, as she ought to be, Lagarde should be ready with a carefully scripted response that acknowledges the improved ability to absorb any economic impact of the pandemic but does not go too far. Might this even go into the introductory statement? It is not unthinkable.


All in all, a restrained approach to communication would seem to better serve the ECB’s purposes at this point, and the press conference should be consistent with this. Reserving the right to ponder major decisions for the seven weeks remaining until December 16 makes abundant sense in the current environment of high uncertainty. Lagarde should not be too tempted to ignore that fact.