ECB Insight: Communications Blitz by Policymakers Could Belie Timid Meeting Outcome

14 December 2021

By David Barwick – FRANKFURT (Econostream) – Seven weeks ago, we noted in this space that the Governing Council meeting of the European Central Bank that was then two days off had been preceded by an unusually thin trickle of communication, at least from the Executive Board. Now, the opposite is more the case, with seemingly every member of the Council having weighed in, in many cases more than once, about coming decisions or the possibility of deferring these.


Alas, the cacophony of commentary hasn’t necessarily brought much clarity, given the number of options to which policymakers have given airtime. But the lack of clarity also has much to do with the fact that rather than receding, the uncertainty that led the ECB to identify December 16 as Decision Day in the first place – a commitment that was itself arguably a bit of a misstep - has augmented.


Observers can reasonably safely assume that President Christine Lagarde’s prediction of an end next March to net purchases under the pandemic emergency purchase programme (PEPP) – which ING speculates was made ‘probably unintentionally’ and which Econostream reported at the time was clumsily handled – will come true.


Any other outcome would be embarrassing, and Omicron doesn’t change this, even if the Council’s gathering this week has now gone virtual; when Lagarde unexpectedly and unnecessarily announced the PEPP’s retirement, it was hardly a secret that an aggressive new variant was within the realm of the possible.


Moreover, since its emergence, policymakers have played down the expected growth impact and generally continued to support an end-March expiry, as did Lagarde herself earlier this month. Indeed, Omicron is seen by some as a further upside inflation risk, which would not argue for prolonging accommodation when the time horizon is already rapidly shrinking.


All that said, it cannot be excluded that Lagarde will merely reiterate the expectation that net purchases will end in March but avoid finalising the deal, though Econostream prefers a clearer solution in which the PEPP’s end-March retirement is announced but it is made explicit that the programme can be reactivated if need be.


In conjunction with a willingness to reinvest maturing PEPP bonds flexibly, such a solution could also address the thorny issue of flexibility. Econostream remains, as expressed here before, ‘sceptical of the likelihood of a wholesale inheritance by the asset purchase programme (APP) of the PEPP’s characteristics’. With the PEPP in reserve, the ECB might also hope to sidestep the contentious matter of how Greek debt is to be treated.


While mindful of the ECB’s oft-expressed willingness to come up with new instruments, and of some observers’ expectation of precisely such an outcome on Thursday, we see this option as a bridge too far for now.


Like most other observers, we assume that APP purchase volumes will be boosted post-March, but only for a quarter or two, with their further evolution contingent on conditions. The uncertainty driving that decision should lead the ECB to defer whatever it reasonably can, consistent with Lagarde’s stated preference to ‘give clarity without making long-term commitment’.


This probably includes the future of the TLTROs, though the relative simplicity of this particular decision could be a way for the ECB to avoid appearing to underdeliver this week.


We assign a low probability to any major change in forward guidance, given that such a change would represent a longer-term commitment, which – along with the associated, potentially heated discussion about the proper policy sequence - can wait.


In terms of rhetoric, Lagarde is highly unlikely to suddenly stray from the theme of transitoriness when it comes to inflation, given how much effort the ECB has expended driving this idea home, and the logic behind the expectation. The question is more one of how long HICP will persist at elevated levels and what the risks are that it doesn’t subside convincingly.


Lagarde will have updated staff forecasts to which her narrative has to correspond; it is clear that these will show the euro area below its medium-term price stability objective. All in all, we see little reason for the cautiously optimistic assessment she offered late last month to change much:


‘We expect that the inflation rates will start to fall from as early as January’, she said then. ‘The negotiated wage settlements have been very moderate so far. For next year, somewhat higher wage demands are partly to be expected. But based on what we are seeing, the settlements should not be on a scale that might trigger a wage-price spiral. … We don’t see any de-anchoring of inflation expectations. … These bottlenecks in, say, computer chips, containers and road haulage capacity are obviously persisting for longer than we had initially thought. But the situation will gradually improve next year in that respect too. … We expect that energy price developments will at least stabilise next year.’


As such, she can probably be counted on to repeat that a rate hike in 2022 is highly unlikely, but may once again – as she did already mid-November – not wish to extend such assurances to 2023.


Will she say that the emergency phase of the pandemic is over? Case numbers in many places, and the threat that Omicron will eventually drive these higher everywhere, probably argue against clearly declaring the crisis to be at an end, though her utterances in this respect would presumably be consistent with any decision on the PEPP. But Lagarde seems likely in any discussion of Omicron’s growth impact to note that economies are taking negative pandemic developments more and more in stride.


Having seen what can happen when the ECB unnecessarily gets ahead of itself, Lagarde would do well to tread with particular caution on this occasion. And if that means underdelivering from the perspective of financial markets, she would ideally not permit such a concern to drive the outcome.