24 Oct 2019
Draghi's greatest hits: never give up (on the good times)
ECB President Mario Draghi presided over his final Governing Council meeting on Thursday. He outlined his achievements in a tone which sounded strangely like the title of the Spice Girls’ 90s single, Never Give Up on the Good Times.
President Draghi said his legacy was to “never give up” and that he was proud of the way the Governing Council (GC) had constantly pursued its mandate.
The policy decision today was in the background of what was effectively a farewell and handover meeting. As widely expected, the GC decided “no change” was appropriate with the deposit rate held at -0.50%, the main refinancing rate at 0.00% and the marginal lending rate at +0.25%.
The deposit rate had been lowered by 10bps at the September meeting. Last month the ECB had also outlined its plans to resume QE. It was confirmed today that purchases will commence from 1 November at a (net) pace of €20bn a month. The forward guidance was also left unrevised and continued to commit to interest rates remaining “at their present or lower levels” until the inflation outlook was “robustly” converging to the inflation goal.
Much like the Spice Girls in the run up to their split with Geri Halliwell, there had been reports of rifts a plenty on the GC ahead of today’s meeting. According to the ECB President however, the council participants had done a better job of patching up differences as Mr Draghi said there was a “call for unity”, whilst he said one dissenter to the September decision had said bygones should be bygones. From 1 November, Christine Lagarde takes over at the helm of the ECB. She sat in on discussions today, though did not participate.
Amidst much speculation that further interest rate reductions will be forthcoming, one wonders if the “call for unity” will carry much weight when/if Ms Lagarde is faced with the prospect of presiding over another easing in policy. On our forecasts, that could happen relatively quickly, with our expectation that there will be another (10bp) cut in the deposit rate at the December meeting. We do though expect the more controversial policy tool, QE, to be held steady at €20bn a month for the time being.
Changing of the guard
Ahead of handing over the reins to Ms Lagarde, the ECB President’s communications today marked only a modest evolution in its tone and assessment of the economic backdrop. On the risk front, instead of describing these as “tilted to the downside”, risks were now more decisively described as “on the downside”.
Furthermore, the prepared statement talked of “ongoing” weakness in international trade and of “persistent” global uncertainties, in an introduction of stronger language on the challenges from the global backdrop. We did not however see any emphasis from Mr Draghi which suggested monetary policy implications should adjust to this. Indeed, we note that the President seemed happy with the way markets had reacted to recent news saying they had “understood our reaction function”.
The press conference concluded in what felt an understated way after Mr Draghi’s time as President, spanning the Greek crisis and his famous July 2012 pledge to do “whatever it takes to preserve the euro”. Mr Draghi would not allude to what he would do next, referring queries to his wife and ducking questions of whether he might make an appearance in Italian politics.
At the end of it all, after eight very significant years, the main question remains whether it will be viva forever for low interest rates and viva for a very long time for QE. For Ms Lagarde, she will have to continue to grapple with the significance of this new world of lower rates for a long time. Luckily for her, her former colleagues at the IMF can help, having just held substantial discussions on negative interest rates at the recent annual meeting.