Ciao, Signor Draghi!
Mario Draghi’s term as President of the ECB ends after eight years. At his last press conference there were no more monetary surprises, but this meeting was no non-event either. Compared to his opening statement at the September Council meeting, the topmost monetary watchdog drew a somewhat gloomy economic outlook. The central bank superiors expect the economy to remain weak. There is thus a risk that the recession in the manufacturing sector could also affect the service sector. This would also damage the domestic economy. Against this backdrop, the monetary policy measures recently discussed by the Governing Council of the ECB should be seen as a hedge.
However, the hopes of market players to obtain further information on the precise structure of bond purchases were disappointed. It is therefore to be expected that APP purchases will be based on past practices. However, subsequent adjustments cannot be ruled out. Given the current conditions, the PSPP should reach its limits by the end of next year at the latest, so we can imagine that the ECB will increasingly target corporate bonds, covered bonds or ABS securities in order to protect the PSPP lines. In the meantime, the central bank will closely monitor how inflation reacts to the recently adopted measures. For the time being, we do not expect any further monetary policy adjustments. The reduction in the deposit rate decided at the September Council meeting will probably be the last for the time being.
What can we expect in view of the change in leadership at the ECB in the future? Mrs Lagarde, as the new President of the ECB, is bound by the monetary policy measures recently adopted. That is why her room for manoeuvre is very limited for the time being. At the same time, however, this gives her time to smooth the waves in the Governing Council. The deep rift in the Governing Council was particularly evident after the September Council meeting. With regard to the future direction of monetary policy, Mrs Lagarde will probably first want to wait for the announced review of the ECB’s monetary policy framework. After that, she can still decide to what extent Mario Draghi’s prescription is still valid to instill more and more of the old medicine into the patient for recovery. Finally, one could get the impression that this is no longer too effective.