IMF Chief Christine Lagarde tapped to lead ECB; policy continuity expected
After weeks of tough negotiations, on 2 July, EU leaders nominated France’s Christine Lagarde, the managing director of the IMF, to replace outgoing Mario Draghi as president of the European Central Bank (ECB). If confirmed, Lagarde would be the ECB’s first female president and would likely keep monetary policy on Draghi’s dovish track. While Lagarde brings an impressive resume to the table, highlighted by tenures at the IMF and in the French government, she lacks central banking experience and will take over the reins in challenging times. Inflation is lingering persistently below target despite ultra-accommodative monetary policy and the Bank’s toolbox to boost price pressures seems to be wearing thin. Moreover, the Eurozone economy is in a period of moderate growth and facing several external risks to the outlook.
Although it is difficult to ascertain Lagarde’s personal views on monetary policy given recent statements have been official IMF comments, she is widely expected to continue to forge ahead with the path paved by Draghi. In past statements, Lagarde has praised Draghi’s “whatever it takes” pledge and supported unconventional policy measures, suggesting she will preserve the status quo. Moreover, Lagarde’s experience with the IMF suggests that she is used to relying on staff and consensus building, and would lean on the executive board and other background players.
Commenting on Lagarde’s appointment, Senior ECB Analyst Piet Philip Haines Christiansen from Danske Bank, added:
“Lagarde has not given monetary policy speeches worth highlighting […], however she is open to unconventional monetary policy and does not rule out new economic thinking. Her reliance on IMF staff implies no imminent change in ECB monetary policy. We see no reason to change our call for a broad stimulus package expected in September.”
Meanwhile, Carsten Brzeski, chief economist at ING, elaborated:
“What kind of monetary policies Lagarde really stands for, no one can currently tell. In our view, a continuation of a pragmatic monetary policy stance as well as a confirmation of “whatever-it-takes” looks likely. Whether or not the ECB under Lagarde will also be willing to go as boldly as Draghi to where no European central bank has gone before will depend on the new balance of power between Executive Board and national governors.”
Looking ahead, persistently low inflation, subdued inflation expectations, modest growth and ample downside risks to the outlook have raised expectations that the ECB will unleash some sort of stimulus in the coming months. However, given that the refinancing rate already sits at zero, it is uncertain what the support will look like.
The research team at Nomura outlined their view, stating:
“We now expect the ECB will deliver a package of measures at its 12 September meeting including a change in guidance (to “extended period” from the current specific time frame), lower interest rates (10bp off the depo rate, to be followed by another cut in December), a resumption of the asset purchase scheme (across all programmes) and the introduction of tiering to insulate financial intermediaries against low interest rates and flat yield curves (though note the account of the June meeting argued that the positive contribution of negative interest rates “was not undermined by possible side effects on bank-based intermediation”).”