ECB Rate Cuts Seen as Done With Lagarde’s Review in Spotlight
Markets are no longer pricing a rate cut next year.
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The European Central Bank is done with cutting interest rates despite persistent downside risks to growth, according to a Bloomberg survey of economists.
With officials increasingly concerned about the impact of negative rates and President Christine Lagarde about to announce a strategic review, most respondents said monetary policy is on autopilot for the next two years. That’s a turnaround from the previous survey which predicted more easing in June. Economists now see the next move as a rate hike by the first quarter of 2022.
Lagarde, who holds her first policy meeting on Dec. 12, is facing mounting pressure from banks and politicians who say subzero rates are damaging the financial system and hurting savers. It suggests her review will have to investigate other ways of using the ECB’s toolkit to revive inflation.
“We don’t think they are going to ease, but if they were going to ease the pressure to do something else rather than cut rates is going to be quite high,” said Peter Schaffrik, a global macro strategist at RBC in London. “This is certainly not an environment to pile something on top after the implementation of the last program.”
The last program was a package of measures in September, weeks before Mario Draghi handed the presidency to Lagarde. He fought off unprecedented opposition in the Governing Council to lower the deposit rate to minus 0.5%, resume quantitative easing and give banks easier terms on long-term loans.
Since then, multiple policy makers have expressed unease over the threat to financial stability as investors turn to riskier investments, a concern that was also at the forefront of the ECB’s own financial stability review. Markets are no longer pricing a rate cut next year.
Economists in the survey expect the Governing Council to change its guidance on future policy by September. It currently pledges that interest rates will remain at current “or lower” levels until inflation is entrenched back at the target.
“Under the assumption of a gradual, though modest, recovery in economic growth, we think the bar for another rate cut or a step up of asset purchases is currently high,” said Barclays economists Philippe Gudin and Christian Keller.
Bond purchases will most likely continue until late 2021, according to survey respondents. They don’t foresee the monthly pace of 20 billion euros ($22 billion) changing until one month before completion of the program, nor are new asset classes such as equities likely to be added to the mix. That may reflect a bet that Lagarde won’t want to reopen old wounds -- QE was at the heart of the dissent over September’s decision.
The economic outlook remains cause for concern. While recent data suggest the euro zone’s downturn may be bottoming out and tensions in the U.S.-China trade war may be easing, economists aren’t counting on the ECB making major revisions to its forecasts. They still see a recession as a near-term risk.
Strategic Thinking
Respondents said Lagarde’s strategy review will be announced by January -- a significant minority think it will happen next week -- but their expectations are modest. A majority expect the Governing Council to agree to flexibility around the inflation goal, allowing price growth to overshoot or undershoot for a while.
They were split on whether the current target of “below, but close to, 2%” will be tightened. Some policy makers argue that phrasing risks leaving inflation too weak, and would prefer to set it at precisely 2%.
A quarter of respondents expect an agreement on more transparency in the decision-making process with policy makers voting on measures and those votes being published.
Climate Conflict
Lagarde has already made clear that the review will also consider how the ECB should react to climate change, an issue of rising global importance but a controversial one for central bankers. She and some of her colleagues have tried to temper expectations, saying price stability remains the key objective.
The survey suggests that climate won’t become a factor in setting monetary policy over the next 12 months. Rabobank economists Bas van Geffen and Elwin de Groot don’t expect the ECB to set any specific targets, though they could eventually exclude the bonds of polluters from QE “in an attempt to win over some of the general public.”
TLTRO Time
The morning of Lagarde’s policy meeting will also reveal how banks are responding to the ECB’s program of three-year loans, with the takeup of the second round of offerings. Respondents predict demand will be 120 billion euros.
To contact the reporters on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net;Harumi Ichikura in London at hichikura@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow
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