ECB Insight: Lagarde’s Announcement of PEPP’s End a ‘Not Very Timely’ Surprise for Some
5 November 2021
By David Barwick – FRANKFURT (Econostream) – For someone normally known as a strong proponent of building consensus, European Central Bank President Christine Lagarde’s announcement last week of the end of the pandemic emergency purchase programme (PEPP) next March has some scratching their heads.
In a move redolent of her predecessor, Mario Draghi, who had a well-established penchant for engineering faits accomplis by effectively pre-committing the ECB via pre-announcements out of the blue, Lagarde on October 28 said following the Council meeting that she had ‘every reason to believe that [the PEPP] will come to its end’ next March.
That was in any case in marked contrast to her reluctance to broach the topic as recently as the September Council meeting, when with a straight face she had called it ‘really too early and unnecessary at this stage to discuss, you know, longer-term issues related to PEPP, and the term of PEPP. As I said, it will be discussed at length, we will enter into a process of a technical review, in-depth analysis of the situation.’
But last week’s announcement was more than just a glaring contradiction of her own vigorously expressed stance just weeks previously; it apparently came without prior discussion at the level of the Council, leaving some nonplussed.
Admittedly, a complete surprise it was not. Banque de France Governor François Villeroy de Galhau on October 12 had already floated what Econostream considered a trial balloon, saying that if the Governing Council judges that ‘the Covid crisis phase is over’, then net purchases under the PEPP would end in March 2022, and adding that ‘[a]s things stand, this is likely to be the case.’
But finding that the overall situation is consistent with an end to the PEPP on schedule next March is one thing, and another is Lagarde’s odd departure from her own previous practice of striving for consensus, which by many accounts had been intended precisely to differentiate her from Draghi and re-establish a sense of unity.
The surprise announcement was ‘not very timely’, one irritated insider told Econostream. The question would have properly been ‘part of a large package’ involving asset purchases in general, rather than ‘unconditional five months beforehand’.
Leaving aside Lagarde’s casual willingness to ride roughshod over the Council’s role in deciding a major policy issue, the timing is another problem. The macroeconomic environment remains highly uncertain, which would have argued strongly for waiting for any additional clarity the 49 days until the December Council meeting might have brought.
One consequence of Lagarde’s undue haste is thus uncertainty – among ECB insiders, no less - as to whether she will wind up with egg on her face.
The PEPP ‘must be state-contingent on financing conditions and the inflation outlook’, one of them said, meaning that if the Council considers down the road that the pandemic is ‘still negatively affecting financing conditions or the inflation outlook, then they may want to readjust the PEPP, maybe keeping it around or introducing some other changes’, notwithstanding Lagarde’s pre-announcement.
Even one insider in favour of ending the PEPP in March felt obliged to introduce a certain conditionality that wasn’t apparent on October 28. The ECB president, in this person’s interpretation, had only suggested that ‘if the macro story remains as it is, then March is the date when we think it will end.’
Lagarde’s view was ‘very valid’, the ECB’s central scenario being ‘consistent with the end of PEPP in March’, this person said. However, he was quick to add, ‘there is dependence on financing conditions, there is dependence on the economy’, and ‘[i]f the scenario changes, then the market should be aware that we may change our tools as necessary.’
Yet another problem resulting from Lagarde’s unilateralism is that her unnecessary announcement of the PEPP’s expiry, a clearly hawkish move, undercut her simultaneous pushback against market rate expectations. One of the insiders Econostream spoke to saw this infelicitous coincidence as part of the reason why markets ignored her pushback and even brought expectations somewhat forward.