Christine Lagarde will on Thursday face her biggest test so far as president of the European Central Bank when she holds her first monetary policy meeting as the chair of its governing council and speaks to the media afterwards.
Investors will closely scrutinise every word for any signs of a shift in policy.
“Ms Lagarde’s signals, or the market’s interpretation of them, may be unstable at first until the patterns are learned, resulting in some communications volatility,” said Mark Wall, chief economist at Deutsche Bank.
Few observers expect the new ECB president to make as dramatic a debut as her predecessor, Mario Draghi, who unveiled a strategic U-turn and cut interest rates in his first monetary policy meeting in 2011, as he confronted the eurozone debt crisis.
Ms Lagarde inherits a more stable situation, though it is not without challenges. Even after years of negative interest rates and more than €2.6tn of ECB bond purchases, economic growth remains sluggish and inflation is well below its objective of below, but close to, 2 per cent. And doubts are growing about whether the central bank can loosen monetary policy further — or if it is running out of ammunition.
Here are five important themes to watch out for on Thursday.
Will she change much?
The main shift under Ms Lagarde is expected to be one of style rather than substance. Unlike Mr Draghi, she is not an economist and she has little direct monetary policy experience. So the former head of the IMF and ex-French finance minister is likely to be less dogmatic than her predecessor and more prepared to take a “wait and see” approach.
“I think it will be a challenge for her, given that she is not an economist and she will have to rely on other members of the governing council who maybe have their own agendas,” said Danae Kyriakopoulou, chief economist at think-tank OMFIF.
Ms Lagarde has resisted being labelled as a hawk or a dove and said she would prefer to be considered an owl — “a very wise animal”. Most economists think she will keep monetary policy unchanged for several months.
“We see no reason for the ECB to adjust its guidance, let alone policy, beyond tweaking its near-term forecasts,” said Florian Hense at Berenberg.
Could she still make an impact?
In the speeches that Ms Lagarde has given since taking over from Mr Draghi at the start of November, there has been a subtle shift in emphasis: she has talked about the negative side-effects of monetary policy more often than expressing her readiness to use all instruments available.
This could be important, given the controversy around negative interest rates and bond purchases in countries such as Germany and the Netherlands, where they are criticised for penalising savers and pensioners, inflating asset prices and propping up zombie companies.
The ECB says it constantly monitors the side-effects of its policies, but Mr Draghi had little sympathy for the complaints, saying that the overall benefits of higher growth and employment outweighed any downsides.
“She has to say something on the side-effects — we need to know the president’s view,” said Frederik Ducrozet, strategist at Pictet Wealth Management. “That will necessarily move markets the first time we get her true view on this.”
What will the ECB say about the economy?
The central bank will update its economic forecasts for the next three years and give its first projections for 2022. Since its previous update, the outlook for the economy has brightened slightly, with eurozone growth beating expectations at 0.2 per cent in the third quarter, while inflation rebounded more than expected to 1 per cent in November.
“For the first time in nearly two years, the macro outlook has stopped deteriorating,” said Mr Ducrozet.
Most economists expect the ECB to maintain or slightly raise its growth and inflation forecasts.
The main focus is likely to be on the 2022 projections. If the ECB predicts inflation of 1.7 per cent in three years’ time, as many economists expect, that would signal that it believes the stimulus measures launched in September will succeed in bringing inflation in line with its objective of below but close to 2 per cent — so it may not need to loosen policy further.
What else will Ms Lagarde be asked about?
Expect plenty of questions about the strategic review of monetary policy Ms Lagarde has promised — the ECB’s first since 2003. She has already said it will examine potential changes to its core inflation objective and how to tackle climate change.
Ms Lagarde may on Thursday specify when it will start, but the governing council is unlikely to have time to settle the review’s agenda and she may want to wait until Fabio Panetta and Isabel Schnabel join its executive board in January before saying much more.
What are the biggest risks?
Soon after becoming French finance minister in 2007, Ms Lagarde was dubbed “Madame la Gaffe” after her plain-speaking style landed her in political hot water. But she was seen as a safe pair of hands in the financial crisis and in her eight years running the IMF.
This week the slightest slip of the tongue could cause volatility in markets — and her task will not be made any easier by the mixed messages that recent data have sent about the state of the eurozone economy.
“Not only might the market struggle to interpret the new messenger at first, Ms Lagarde might also struggle to know what message to send if the economy is in a state of heightened uncertainty,” warned Mr Wall at Deutsche.
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