New ECB president sticks to same hymn sheet

Policy interest rates, forward guidance and asset purchases were left unchanged as Christine Lagarde’s first press conference as the president of the European Central Bank (ECB) was largely a non-event. Lagarde delivered the prepared statement from the Governing Council, which was mostly unchanged from recent meetings. Lagarde reaffirmed the ECB’s commitment to keep interest rates at current levels or lower, and maintain the pace of quantitative easing until inflation rises to more satisfactory levels.

There had been some speculation that a recently announced strategic review could trigger a change in ECB policy, particularly on the use of negative interest rates. However, when asked about the subject, Lagarde stated that the Council is aware of the unwanted side effects of negative interest rates, but believes that the policy tool is efficient and successful in boosting growth.

On the strategic review, Lagarde unveiled that it will be conducted over 2020, and will focus on how monetary policy works, including how it impacts climate change, inequality, and the role of technology. The review, the first in 16 years, will consult with the European Parliament, academics and civil society leaders. The review could lead to a change in how the ECB sets its policy, and potentially even its inflation target.

In our view, the change in leadership was always unlikely to change the direction of policy. Lagarde’s comments today should reassure investors of the ECB’s commitment to keep monetary policy very loose. Indeed, we continue to forecast potentially one more cut in the deposit rate (to -0.60%) in the first quarter of 2020.