Christine Lagarde may not only find her hands full when she takes over from Mario Draghi as head of the European Central Bank later this year, she may well find them tied too.
Draghi and his 24 colleagues on the ECB governing council were not mincing words about their plans for monetary stimulus when they met in early June in Vilnius.
There was “broad agreement,” according to the minutes of the meeting released Thursday after a longer-than-usual delay because of the external meeting location, that heightened uncertainty means the council needs “to be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments, as appropriate, to achieve its price stability objective.”
Not to leave any doubt in peoples’ minds: “Potential measures to be considered included the possibility of further extending and strengthening the governing council’s forward guidance, resuming net asset purchases and decreasing policy rates.”
Added Measures
This look to the immediate future came on top of measures taken at the June meeting. The council extended its guidance on the date for raising rates to mid-2020, affirmed that it will be reinvesting bond proceeds as they mature to maintain the same level of quantitative easing, and set interest rates on the targeted long-term refinancing operations at very accommodative levels (though somewhat less favorable than in the previous round).
The minutes were also revealing in showing the influence of Philip Lane, the former central bank governor of Ireland, who took over as chief economist at the beginning of June. “Mr Lane” appeared a baker’s dozen times in the minutes, analyzing the economy, noting the downgrade of growth forecasts, arguing in favor of keeping negative interest rates, proposing the package of measures for the June meeting, and so on and so on.
Important Role
With Lagarde taking the helm in November as a non-economist and non-central banker, it seems certain that the role of chief economist will become important in a way it hasn’t been since Otmar Issing inaugurated it under Wim Duisenberg.
In fact, as central bankers worldwide seem somewhat helpless and even clueless in the face of stubbornly low inflation and the sluggish impact of monetary stimulus, it is probably no coincidence that the two most important central banks in the world – the Federal Reserve and the ECB – are being entrusted to trained lawyers more at home in the world of politics than monetary policy.
Investors are presuming, given her record as managing director of the International Monetary Fund, that Lagarde will come in as a raging dove, doing whatever she can (or whatever it takes) to revive Europe’s lackluster economy.
IMF Report
If anyone had any doubts on that score, the IMF’s annual report on the eurozone, released by some strange coincidence on Thursday as well, gave a full-throated endorsement of the ECB plans for stimulus given the risks posed by Brexit, Italy, and trade tensions.
The Eurozone faces “a prolonged period of anemic growth and inflation,” the IMF report said, making it “vital” for the central bank to remain accommodative and even increase stimulus along planned lines.
Not least among the IMF concerns was the forecast that inflation would remain far from the ECB’s 2% target until 2022, and is expected to be only 1.3% this year.
Seamless Transition
Draghi clearly has no intention of limping out of office as a lame duck president but will steer the central bank in the direction he wants up to the last minute. Market participants are betting overwhelmingly the ECB will reduce its deposit rate, already at a negative 0.4%, at the 25 July meeting or in mid-September.
Given Lagarde’s dovish stance, the transition should be seamless. In any case, Draghi has committed the bank to holding off on rate increases a year and a half into her term and is likely to set the ECB on an accommodative trajectory of cutting rates and re-starting the asset purchase program.
No Place For Hawks
There was no place in this scenario for the Bundesbank’s Jens Weidmann, a hawk who publicly disagreed with Draghi’s easy-money policies, to take the top job. Whatever the backroom maneuverings – rumor mills are full of them – it’s not likely that Weidmann ever had a real chance of getting the ECB post.
One of the overlooked aspects of the ECB succession is how the eurozone central bank modeled on the Bundesbank and originally dedicated to its principles is slipping from the grasp of the Germans even as monetary policy diverges ever more from the strict German line.
International Prestige
EU leaders opted for international prestige over a monetary policy track record in picking Draghi’s successor. As the role of central bankers becomes increasingly political, the former French finance minister no doubt looked appealing.
And, of course, French President Emmanuel Macron could not let another round of leadership changes go by without getting a French national into one of the top EU jobs. After all, it’s been nearly eight years since Jean-Claude Trichet stepped down as ECB president.