Lagarde ECB speech: What to watch for

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Our take on Lagarde's speech this morning in Frankfurt.


Context: The ECB is still dovish as revealed by the latest comments of members of the Governing Council. We have summarized some key recent headlines below.

  • Lane: doesn’t think that the ECB is at the limit yet.
  • Vasle says there is “still room” to ease policy.
  • Guindos: ECB won’t reach limits on QE program “shortly”.
  • Muller says more assets could join stimulus list in slump.

The ECB wants to give the impression that it can further support economic activity, if necessary. However, if it chooses to do so, it will probably have to think twice about diversifying the assets it repurchases. According to our estimates, the ECB already owns around 80% of Germany’s debt and roughly 70% of France’s OATs. If the ECB decides to extend and/or increase the size of the QE program in the future, it will need to make a trade-off between buying lowest-rated Eurozone government bonds and buying high grade corporate bonds. From our viewpoint, the ECB’s next major step will be to buy more corporate debt.

Interestingly, for the first time since the introduction of the accommodative monetary policy, the ECB has made a mea culpa regarding the impact of negative rates. In a report published two days ago, the ECB strongly emphasizes on the side-effects of negative policies, mentioning that it leads to “excessive risk-taking” and hurt bank profitability. One of the key upcoming debate within the Governing Council will be to evaluate at what level the disadvantages of negative rates tend to surpass the advantages.

On another note, the latest ECB minutes released yesterday were uninformative. The ECB has reiterated its strong call on governments to do more on public investment and fiscal stabilization wherever possible. We heard it before, but we expect the ECB will get louder and clearer on that point in coming months.

What to expect today:

Many ECB watchers hope Christine Lagarde will finally deliver a speech on monetary policy and will give the direction the ECB is heading. We believe they will be quickly disappointed. Given the flagrant dissension within the Governing Council, she could play safe and wait for the ECB press conference taking place on December 12 to really take a stand. On this occasion, the ECB will update its economic forecasts and will unveil its first projections for 2020.

We are all aware that Christine Lagarde does not have strong views on monetary policy yet. When she was appointed, we did our research and we only found two speeches over the past years covering monetary policy issues. In 2013, invited as a speaker by the Fed of Kansas City, she endorsed unconventional tools, including the OMT program. In 2016, she supported the introduction of NIRP.

In the short and medium term, she is very unlikely to revolutionize central banking, and she is most likely to increase pressure on Eurozone governments to use fiscal policy.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S - Representative Office
Boulevard Plaza - Tower 1
30th floor, office 3002
Dubai Downtown, Burj Khalifa area
Dubai
UAE

UAE

Trade responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.