UBS takes a look at the ECB decision
For starters, UBS has a great title for its report on the December 12 ECB decision: ‘The changing of Lagarde’.
After all, it will be the first meeting for the new central bank leader. While any hope for a change in policy is virtually nil, the chance of a communications mixup is always high with a new leader.
“At her first meeting as ECB president, we think Christine Lagarde’s priority will be to begin uniting a divided Governing Council, rather than announcing any immediate policy action,” the report says.
The main question will be on the fiscal side and what she might try to do to prod for more help from leaders. Draghi has badgered governments for years to spend more and Lagarde doesn’t have any special tools available in that regard but she may try for fresh ways to get headlines and attention.
Otherwise, UBS says to expect little in the way of change. Indeed they see the central bank on hold until the end of 2021 ‘at least’:
“The central case for December is very much ‘on hold’, particularly given that we expect the ECB to make only modest tweaks to its forecasts,” they write.
One thing to watch out for is a review of the mandate as the ECB tries to uncover new tools to combat low inflation. The Fed is working through this now and hinting at a switch to average inflation targeting, something that would call for overshoots to balance out undershoots. That would mean rates stay lower for longer.
The main event will be the Q&A and the possibility of some kind of slip up. One front for that will be on the lower bound for policy. She will likely indicate that there is still room to cut but the pitfall would be sending some kind of signal (or accidental slip) that the space is going to be used.
As for forecasts, they see 2020 growth lowered to 1.1% from 1.2% and 2021 to 1.3% from 1.4%. On core inflation they see a small chance of a trim to 1.0% from 1.1% but believe it will be left unchanged with headline inflation ticking to 1.3% from 1.2%.