Presiding over her first meeting of the European Central Bank on Thursday, Christine Lagarde is all but certain to keep money taps wide open and may provide fresh clues about a broader policy revamp that could become the cornerstone of her tenure.
The former International Monetary Fund chief, who took over Europe’s most powerful financial institution on Nov. 1, has promised a rigorous assessment of how the ECB does business, weighing fundamental issues like changing the inflation target and how to fight climate change.
The review, due to start early next year and mirror a similar endeavour under way in the United States, comes as monetary policy is on auto pilot and financial markets are sanguine, allowing policymakers on both sides of the Atlantic to contemplate longer-term issues.
Financial analysts see the ECB on hold throughout next year, a view that can only have been strengthened by the Federal Reserve signalling on Wednesday that it was unlikely to touch interest rates in 2020.
With the threat of a recession averted but no euro zone recovery in sight, the ECB is expected to say that risks are still skewed towards more policy easing.
“We see no reason for the ECB to adjust its guidance, let alone policy, beyond tweaking its near-term forecasts,” Florian Hense at Berenberg said. “We expect the ECB to keep its stance unchanged in 2020 while it reviews its strategy.”
The euro was close to a two-month high against the US dollar at $1.1140 early on Thursday.
Lagarde’s predecessor could only have dreamt of such a placid start. Mario Draghi cut rates just three days into his term as ECB president, then spent the next half-decade fighting a debt crisis.
As a parting gift to Lagarde, Draghi devised a stimulus scheme that will require little intervention for some time as bond purchases, negative rates and ultra-cheap loans to banks will keep borrowing costs near record lows.
The ECB will announce its rate decision at 1245 GMT, followed by Lagarde’s news conference at 1330 GMT.
As policy stays unchanged, focus is likely to shift to Lagarde herself and her style as investors search for clues about the future of stimulus and the policy review.
The first issue is whether she is fully committed to the Draghi package. While she has briefly confirmed the ECB’s policy stance, it remains to be seen whether she stands 100 percent behind the measures.
Markets will also scrutinise new economic projections, though all indicators suggest they are only going to change at the margins and that initial 2022 numbers will show a slow but steady improvement in growth and inflation.
Investors will also look at how Lagarde fields questions given her limited experience in monetary policy. She has asked for patience while she is on an accelerated “learning curve”.
But the big issue will be the scope of the policy review.
The world economy has changed since the ECB last did such a deep dive in 2003, with the neutral interest rate now sharply lower and under sustained downward pressure from an ageing population. Inflation is meanwhile barely responding to rising employment and central bank money printing, throwing widely accepted principles of central banking into question.
“The scope of the strategy review may not be finalised before early 2020, but it should be centred on four main issues: the definition of price stability and the inflation measures; the side-effects of unconventional policy measures; the internal and external communication strategy; climate risks,” said Frederik Ducrozet at Pictet Wealth Management.