Q. What to expect from the ECB as Ms. Lagarde takes the seat as new president?
A. The October ECB meeting was a dignified farewell for Mr. Draghi, and in principle, the answer to our question of the week ought to be simple. Markets should expect Ms. Lagarde to continue the line set by Mr. Draghi, committing the central bank to a very accommodative policy stance, for a long time. The shift to state-contingent forward guidance on rates and QE is a big move by the ECB, and we doubt that Ms. Lagarde will push back against this change. Indeed, we think she broadly agrees with this strategy, indicating that investors should be able to make two overall assumptions even with the change in leadership at the ECB.
First, negative rates are now a structural feature of the central bank’s policysetting, and we doubt that Ms. Lagarde will challenge this assumption, though markets will listen carefully to the new president's words on this issue. Secondly, the new QE program also likes it is here to stay—at least in the next 12 months—insofar as its guidance is explicitly tied to the rate on rates.
The details around these two core assumptions are important, but not anything that risks shifting the main story. At the time of writing, markets are still pricing-in one more deposit rate cut in H1 next year. We are inclined to take the other side—due mainly to our anticipation of stronger data in the next six months—but we reckon that the ECB will deliver according to investors' expectations. In short, unless markets price out the rate cut between now and March, the central bank likely will deliver. Finally, the asset mix in the new QE program also is relevant, though we doubt that the ECB will be particularly transparent. We’re betting on a 60/40 split in favour of sovereign bonds, but in practice, it will vary a lot from month to month.
Chief Eurozone Economist