Lagarde prepares ECB debut

• Policy unchanged

• Projections unlikely to change much

• Clues about review sought

• Style in focus

Presiding over her first presser of the European Central Bank today, Lagarde is expected to confirm once again the current policy setting, giving the ECB time to focus on the planned review of its overall policy framework.

Final Eurozone GDP and PMI readings broadly supported this neutral picture, while the  confidence that a deep recession can be avoided is strengthening (Figure 1)  despite the fact that German manufacturing and production numbers still look weak. Exports and overall trade are actually holding up much better than expected, which together with still strong labour markets is underpinning hopes the net exports and consumption will continue to support growth not just in Germany.

Figure 1 : December German ZEW investor confidence outcome, end the year firmly in positive territory at the highest level since February 2018.

As there is nothing in the data to really challenge the ECB’s overall policy stance, the focus turns to the tone and presentation style that President Lagarde will have. The “risk” is that the presser will be as equally uneventful as her testimony before the European Parliament. Lagarde’s team building exercise seems to have worked, and at least in public there has been a pretty consistent message since she took over, which is very likely to be confirmed today. Additionally it will be interesting to see whether she will fully back Draghi’s package.

Citi Bank: All key interest rates will likely be left unchanged, and the forward guidance reaffirmed. The main interest at this meeting will be the new Eurosystem staff projections, extended to 2022, to gauge whether the September package will be sufficient to bring inflation back into line with the ECB’s target over the forecast horizon. If not, investors’ attention will quickly turn to the ECB’s toolbox and what instruments the Governing Council would be willing to use and when, in order to defend its credibility in the absence of large fiscal support. The upcoming strategic review of monetary policy will also likely be the focus of many questions.

Hence as reported by Citi, other than Lagarde’s style, ECB projections could also monopolize attention. Even though the ECB remains ready to act again and tweak all its measures if necessary, it has already done a lot and now needs to keep an eye on the side effects of the very expansionary monetary policy, while politicians need to do their bit to support the economy.

The central bank won’t be reducing the degree of stimulus any time soon with many analysts supporting that this will continue until mid-2020 unless there is a major change in circumstance.

Central bankers will be conducting a comprehensive review of the policy framework, however, with a special focus on the inflation target. A more symmetric definition, which stresses that the ECB can see through lengthy inflation overshoots as well as periods of too-low headline rates is likely to come in the first quarter of next year. The inclusion of owner-occupied housing costs in the HICP number also remains a challenge especially as house prices are rising rapidly in some areas, also thanks to the low interest rate environment.

Bund yields have nudged higher over the past week, but the German 10-year has so far failed to move lastingly above -0.3%. Uncertainty on trade and Brexit are keeping a lid on yields, although there is the risk that if things go the way markets want and a phase one trade deal is confirmed, and in the UK PM Johnson gets his majority, there could be a sharp rise in yields, if markets price out further easing and start to look ahead to central banks removing some of the stimulus.

However this is far away for now, while central bankers don’t seem to add further easing.