French President-designate of the European Central Bank (ECB) Christine Lagarde reacts during a meeting prior’s to attend a European Parliament’s Committee on Economic Affairs at the EU Parliament, in Brussels, on September 4, 2019.
JOHN THYS | AFP | Getty Images
Steering markets with the language of monetary policy is a tricky business.
Every nuance counts and even semantics can move markets. New President Christine Lagarde will chair her first European Central Bank (ECB) meeting and the subsequent press conference on Thursday and all eyes and ears will be on her.
The big question is whether there will be any hints on future policy decisions.
“Thursdays press conference will be a watershed for financial markets. More realistically, the policies already announced and set on auto-pilot by (ex-chief Mario) Draghi, are unlikely to change, at least immediately,” said Lorenzo Codogno in a research note.
“However, any hint on the future direction of policies would be hugely important, and potentially highly relevant for financial markets.”
The new ECB president has announced a swift policy review, the first the euro zone central bank has performed since 2003. She might also see her primary task as reuniting the ECB’s Governing Council, healing the wounds from the controversial policy decision to reinstate quantitative easing (QE) in September. One indication for this interpretation is that in recent speeches she has placed more emphasis on the negative side effects of the current policy stance — more so than what Draghi would have ever done.
Whether or not the ECB will need to ease further in the coming weeks will very much depend on the economic outlook and inflation expectations. On Thursday, the new quarterly projections for growth and inflation will give the markets an idea of what the ECB thinks about both data sets, especially as they will include the effects of the September policy package.
“Maybe the most important figure in the new projections will be the 2022 inflation forecast which represents the ECB’s ‘medium-term’ over which it tries to steer inflation towards its target,” said Dirk Schumacher, an ECB watcher with Natixis, said in a note.
“Any number which doesn’t show a further increase in inflation during 2022, when compared to 2021, would be usually interpreted as dovish, signaling a low hurdle for further policy easing going forward.”
It is always tough for markets to get used to a new central bank president, the way she will communicate and how subtle her messages will be. Lagarde has also never been a central banker before. Instead of Draghi’s traditional “tie-guessing” at press conferences, investors might start to look at her colorful scarves to find a hint on what comes next in terms of policy action.
Lagarde herself seems to be unimpressed with traditional monetary policy categories like “doves” (those who tend to like looser monetary policy) and “hawks” (those who err on the side of caution when lowering rates).
“I hope I will be an owl. I like owls. They are very wise animals,” she said in an interview with the German weekly Die Zeit early in November.
