ECB rate cuts seen as done with Lagarde’s review in spotlight

Bloomberg

The European Central Bank is done with cutting interest rates despite persistent downside risks to growth, according to a Bloomberg survey of economists.
With officials increasingly concerned about the impact of negative rates and President Christine Lagarde about to announce a strategic review, most respondents said monetary policy is on autopilot for the next two years. That’s a turnaround from the previous survey which predicted more easing in June. Economists now see the next move as a rate hike by the first quarter of 2022.
Lagarde, who holds her first policy meeting on December 12, is facing mounting pressure from banks and politicians who say subzero rates are damaging the financial system and hurting savers. It suggests her review will have to investigate other ways of using the ECB’s toolkit to revive inflation.
“We don’t think they are going to ease, but if they were going to ease the pressure to do something else rather than cut rates is going to be quite high,” said Peter Schaffrik, a global macro strategist at RBC in London. “This is certainly not an environment to pile something on top after the implementation of the last programme.”
The last programme was a package of measures in September, weeks before Mario Draghi handed the presidency to Lagarde. He fought off unprecedented opposition in the Governing Council to lower the deposit rate to minus 0.5%, resume quantitative easing and give banks easier terms on long-term loans.
Since then, multiple policy makers have expressed unease over the threat to financial stability as investors turn to riskier investments, a concern that was also at the forefront of the ECB’s own financial stability review. Markets are no longer pricing a rate cut next year.
Economists in the survey expect the governing council to change its guidance on future policy by September. It currently pledges that interest rates will remain at current “or lower” levels until inflation is entrenched back at the target.
“Under the assumption of a gradual, though modest, recovery in economic growth, we think the bar for another rate cut or a step up of asset purchases is currently high,” said Barclays economists Philippe Gudin and Christian Keller.
Bond purchases will most likely continue until late 2021, according to survey respondents. They don’t foresee the monthly pace of 20 billion euros ($22 billion) changing until one month before completion of the program, nor are new asset classes such as equities likely to be added to the mix. That may reflect a bet that Lagarde won’t want to reopen old wounds — QE was at the heart of the dissent over September’s decision.