ECB Insight: Lagarde Kicks the QT Can Down the Road

26 October 2023

By David Barwick – FRANKFURT (Econostream) – One might wonder what the European Central Bank Governing Council discussed at its latest monetary policy meeting, given the absence of any real decision and the evident reluctance of authorities to broach new topics for which this might have been a sensible occasion.

As it is, we strongly suspect that rate-setters were content to revel in a bit of pomp and ceremony not typically part of gatherings in Frankfurt; to enjoy Athens, the setting of this particular Council meeting for the first time since 2008; and to bid a fitting farewell to their colleague, outgoing Banca d’Italia Governor Ignazio Visco, after his 12 years of service, undistracted by the need to wrestle with unpleasant policy questions.

As such, the relatively short press conference Thursday with President Christine Lagarde did not abound in news, bearing out our suggestion on Tuesday that the last such occasion would ‘not be the worst blueprint’ for this time, either. Indeed, though today’s opening statement was naturally updated to include the latest data, the Middle East violence and rising bond yields, the text borrowed liberally from that of 14 September.

In particular, interest rates, she made clear, are still considered to be at levels that need but be maintained to help restore price stability, and coming decisions will preserve monetary restrictiveness as long as needed – this part was unchanged.

Lagarde naturally readily acknowledged the latest decline of headline inflation along with that of most core measures, even as she reiterated the determination of the Governing Council to restore price stability in a timely manner in the context of still too-high price pressures.

The tightening bias thus remains, as it must. ‘The fact that we are holding doesn’t mean that we will never hike again’, she said. In contrast, easing ‘was not discussed at all, and the debate would be absolutely premature’, she insisted, scoffing at the very question of the first cut’s possible timing.

Echoing Chief Economist Philip Lane, she noted that a ‘wealth of numbers and data and intelligence’ on wages, elements ‘critically important to determine the inflation outlook’, would not be available until well into 2024, effectively leaving the ECB in wait-and-see mode.

All the same, there seemed little doubt that the ECB’s appetite for monetary tightening is rather sated. There was no serious hint that the ECB had merely paused and was now wondering when another hike might be appropriate. ‘For the moment, we are saying that we have to be steady, we have to hold’, Lagarde said. ‘This is the decision of today: we are holding.’

Even when invited to respond hawkishly to the scenario of another spike in energy prices, a real possibility given the conflict in the Middle East, Lagarde didn’t bite, despite her own rephrasing of the question to mean,  ‘Have we learned anything from the last energy crisis’?

Rather, her wordy response, in which she noted that ‘the interest rate [already] sits at a very high level of 4%’ and that robust labour markets are now weakening, could be interpreted to mean that even under this scenario, the ECB would be in no rush to further tighten policy.

And the on-hold approach to policy apparently extended beyond borrowing costs. Asked by the very first questioner whether the Council had discussed ending PEPP reinvestments before current forward guidance envisages, Lagarde said no. ‘Nor the PEPP, nor the remuneration of required reserve, have been discussed at this meeting’, she said, and would be drawn out no further on the subject.

That all members of the Council agreed with today’s decision, as she volunteered more as an afterthought close to the end of the press conference, is no surprise, given the uniformity of public comments in the run-up to the meeting and the fact that events have been more or less confirming the latest projections. She was doubtless gratified to return to unanimity after having had to make do with a ‘solid majority’ in September.

But then, this was evidently the kind of relaxed monetary policy meeting every member could probably live with easily: essentially no decision to be made, and that in the context of a pleasant change of surroundings. Satisfaction over the return of Greece as a full-fledged member of the euro area has to have permeated the atmosphere.

We don’t doubt that such an occasion from time to time fosters a camaraderie that facilitates deliberations when tough decisions, unlike today, are hanging in the balance. That could prove useful in six weeks; December’s gathering will be back in Frankfurt, and the ECB may find it imprudent to kick the cans of QT, reserve requirements and the operating framework yet further down the road.

That said, one shouldn't assume that within the bowels of the ECB, no one is working on these issues yet. Ideally, Lagarde would not be allowed to get away with a repeat of today's dismissal of the very subject.