ECB Insight: Has the ECB Painted Itself into a Corner?

1 December 2021

By David Barwick – FRANKFURT (Econostream) – The monetary policy meeting of the European Central Bank Governing Council to take place starting two weeks from today may have become more interesting yet in light of increasing speculation that a number of its members would prefer to postpone some of the major decisions previously envisioned emerging from the occasion.

Econostream does not know to what extent that faction will prevail. But it is easy to imagine that prevail they will to some degree. We think back to a speech in October by Chief Economist Philip Lane, whose dovish remarks, we wrote, ‘might be best considered in the context of the question of what the ECB will do if the prevailing uncertainty hasn’t diminished significantly by December’s Governing Council meeting.’

‘While the ECB has apparently committed to making important decisions in December and seems likely to follow through,’ we observed then, ‘it is bound to be aware that taking major steps in an environment that remains unexpectedly opaque would be inconsistent with its insistence on minimising the risk associated with moving too soon.’

At the time, we suggested that Lane could ‘be laying the groundwork for the ECB to potentially underdeliver on December 16’, but reasoned that ‘more explicit communication’ to that effect would have to follow if the ECB decided to do so.

So far, there has been no such clear message. Rather, what was always apparent was that there were those who would go more slowly and those who would go less slowly.

For example, one insider said a few weeks ago to Econostream, ‘Nobody would like to say categorically that it’s December or nothing, but I see it as very, very likely that in December there will be a decision about the future of the PEPP and potential changes to the APP.’

This person dismissed supply constraints as mainly ‘just timing issues’ - an idea expressed by Bundesbank President Jens Weidmann one week ago when he said that the strong recovery was ‘probably only postponed’, and by Executive Board member Isabel Schnabel last week when she said that supply constraints ‘merely shift activity over time’  – and characterised them as primarily a risk, via second-round wage effects, to medium-term inflation and hence a clear reason not to defer important decisions.

But another insider emphasised the need for the ECB to remain data-driven and patient, going as it were with the flow. This meant that in December, ‘we will only be able to tell as much of the story as we can be sure of’ at the time, he said. As for announcements about precise volumes and instruments, this ‘will come only gradually’, he said.

While December would bring updated forecasts, he reasoned, these would be produced under conditions of elevated uncertainty and, as always, be subject to future revision. Therefore, he said, ‘don’t look to December to answer all the burning questions that are out there; it just can’t be done.’

Yet another person echoed that theme, saying that in December the Governing Council would not yet be ready to enunciate its plans for withdrawing policy support but that this was perfectly okay in view of the data-driven nature of such decisions.

Beyond asset purchases, various people including Schnabel also made clear in the last weeks that the issue of the TLTROs, as Econostream said on November 15, ‘could easily find itself on the back burner at the next Council meeting’.

All of these people were speaking before the Omicron variant of the coronavirus began to force itself on public consciousness a week ago, making it easier to envision that the reluctance to take any bold steps has only grown in recent days.

On the other hand, in an interview with French daily Les Echos published just yesterday, ECB Vice President Luis de Guindos appeared unimpressed by Omicron, calling it, the current German wave and the lockdowns elsewhere ‘always unfortunate’, but part of a situation ‘different from that in 2020’ thanks to vaccines and economic adaptation.

And that is just one of many examples of Europe’s monetary authorities lending credence to the idea that December should live up to the billing President Christine Lagarde and other central bankers from the Executive Board on down have been steadily giving it.

Inasmuch, if the ECB finds itself painted into a corner, it may want to consider whether that was avoidable. Its constant references to the prevailing high uncertainty were never entirely consistent with its willingness to commit to December, any more than was Lagarde’s sudden pivot at the last policy meeting from calling it ‘really too early and unnecessary at this stage to discuss, you know, longer-term issues related to PEPP, and the term of PEPP’ to announcing its expected end in March.

December 16 may wind up a face-saving exercise. We suspect a compromise is on the way that will allow the ECB to avoid under-delivering so much as to be embarrassing, but that will buy it a bit more time.