ECB Has Much to Debate, But Lagarde May Have Much Less to Communicate

12 April 2022

By David Barwick – FRANKFURT (Econostream) – The April monetary policy meeting of the European Central Bank’s Governing Council is set to be the scene of particularly interesting deliberations to which the subsequent communication by ECB President Christine Lagarde may not live up, given the likely absence of any major decisions and a clear preference for leaving options open.


Within the Eurotower, a number of governors are likely to push for net purchases under the ECB’s asset purchase programme (APP) to conclude sooner rather than later so as to leave space between the end of these and rates lift-off in September, probably the leading contender for the distinction as of now.


Whilst June could be the last month of net asset purchases and is indeed the last month for which the ECB defined purchase volumes at the March meeting, from today’s point of view July seems more likely to get that honour. This is especially so if the ECB declines to be nailed down on Thursday in this respect; in the somewhat less likely scenario of an end to net purchases in June, then the ECB would be more inclined to say so now.


However, some Council members fret that if the ECB were to commit to an ending date too early, a worsening of the economic fallout from Russia’s war against Ukraine could force the institution to backpedal, which they would prefer to avoid.


As for net purchases going into August, there remains an outside chance of this, but the ECB’s emphasis on gradualism and hiking rates only ‘some time after’ the end of net asset purchases is seen as less consistent with extending the buying that far.


With everything connected in some way or another, it will be hard for policymakers to avoid discussing the controversial issue of when to start hiking rates - some governors favour July - though it is easy to imagine that Lagarde will be reluctant to provide much insight into that debate.


As part of the rate hike discussion, the Council may soon direct its gaze to the appropriate spread between the deposit facility rate and the rate on main refinancing operations, which could be in for narrowing during the tightening process, as well as to the size of a first rate hike. With respect to the latter, the baseline remains 25 basis points, but a 50 bps move may warrant consideration. Lagarde would probably need to tip markets off in the non-baseline case that the ECB decides on this, but this week would be early in any event.


On the other hand, the Governing Council could announce an end to the particularly beneficial conditions of TLTRO III funding. In a similar vein, it is likely to discuss the tiering multiplier. Some governors want to increase this, and while there is no clear consensus going into the meeting, a decision could come. However, this is seen as less critical given the increased probability that the ECB will start hiking rates reasonably soon anyway.


With respect to the ECB’s apparent desire to devise a new instrument to make sure sovereign spreads stay in line, details are unlikely to be forthcoming this soon, given all the issues that need ironing out before anything is ripe for communication.


Also improbable is that the ECB at this early date will discuss quantitative tightening. Providing firm guidance regarding reinvestment of APP redemptions – as it has done with respect to the pandemic emergency purchase programme (PEPP) – is only a little less unlikely to get time this week.


Naturally, macroeconomic prospects will rank high on the agenda, with an update – though not in the form of numbers for public consumption – of the March outlook a matter of keen interest. As last month’s projections were quickly, if not immediately, seen as outdated, Chief Economist Philip Lane will want to paint a picture that forestalls charges that the ECB has drifted further behind the curve.


When the Council members from larger euro area member countries make their statement, the risk associated with a French presidential election victory by rightwing candidate – and Lagarde compatriot - Marine Le Pen will probably be in for mention. Lagarde will be ready with a diplomatic response to the related question sure to come during the press conference.


If Lagarde surprises in any direction, an ECB insider Econostream spoke to only today thinks that, compared to market expectations and the general situation, she is more apt to do so on the dovish side. Econostream is a bit less convinced of that, given how vocal Council hawks have been recently and the clear momentum that has been gathering in favour of 2022 rates lift-off.


Whilst Lagarde has for some time stopped ruling out the latter scenario, she could easily be more explicit about ruling it in, implying room for error on the hawkish side. On the other hand, fascist Russia being on the verge of a renewed attempt to assert itself militarily in neighbouring Ukraine with all the uncertain implications of nearby war, Lagarde, no hawk to start with, might be more keen to reassure observers that the ECB is attentive to the possibility of growth faltering to such a degree as to mitigate inflationary pressures.


In any event, the ECB said today on inquiry that Lagarde would be participating as usual in the Governing Council meeting, despite having come down with Covid-19. Although it wasn’t clear whether her participation would be virtual or physical, there would be no impact, the ECB said, much as Lagarde herself had assured observers when announcing her infection last week via Twitter.