ECB: No Mere Communications Gaffe

Published on January 21, 2021

As those who closely follow the European Central Bank and financial markets know by now, the biggest market-moving news by far out of today’s unchanged policy Governing Council meeting was the inclusion of the following line in President Christine Lagarde’s official opening statement:

If favorable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favorable financing conditions to help counter the negative pandemic shock to the path of inflation.

For all of President Lagarde’s efforts to downplay that line, its inclusion was not some sort of communications gaffe, but was indeed important, especially in light of the near-term resurgence of Covid risks; and despite her efforts to point to the word “equally” to sell it as a neutral message, it was nothing of the sort.

Since memories can fade fast, we would remind you first of what we wrote two days ago in our preview of the meeting today (SGH 1/19/21; “ECB: The Q1 Covid Lockdowns”):

** Indeed, ECB officials believe they have provided easily enough room for PEPP purchases that, if anything, it may raise the question of whether they would need to continue to buy a last hundred or so billion euros of bonds in the first quarter of 2022 if the economy performs as expected. While a question for another day, that view is in and of itself telling.

** The main message on the policy side will thus be that the ECB, with an eye to a rebound in the spring, will seek to keep overall financial conditions easy and stable, essentially where they are, and that the PEPP program, barring any nasty surprises, was already calibrated to provide more than enough stimulus to cover 2021.

And regarding those near-term economic risks, the money line from Lagarde was here:

Incoming economic data, surveys and high-frequency indicators suggest that the resurgence of the pandemic and the associated intensification of containment measures have likely led to a decline in activity in the fourth quarter of 2020 and are also expected to weigh on activity in the first quarter of this year. In sum, this is broadly in line with the latest baseline of the December 2020 macroeconomic projections.

With the relevant SGH excerpt on the outlook from Tuesday’s report below:

** The lockdowns will clearly exert a negative influence on Q1, 2021 Eurozone growth, but ECB officials point out that their own forecasts for the first few months of 2021 had already been lowered from the September 2020 outlook to around 0.6%… In other words, the ECB was already quite cautious in its recovery outlook going into 2021. Having said that, and while this meeting is not a forecast revision round, ECB officials suggest that Q1 growth could end up coming in lower than even their modest numbers, closer to zero, or even register a slight negative, as the Covid shutdowns put a renewed winter chill on service spending.

We include these excerpts as they start to explain why, and confirm market suspicions, the inclusion of that new PEPP line was more than a mere “on the one hand, on the other hand” hypothetical.

Rather, it was a nod to the less dovish (we hesitate to call anyone hawks in the current environment) members of the Governing Council who believe that while yes, the ECB can always do more if needed (use all its tools, etc., etc.) the current stimulus provided is probably more than sufficient given the base case outlook, including the recent bad news. Whether that ends up the case of course is anyone’s guess, but for markets living off ever more central bank manna, it is a small wake-up call, nevertheless.

Indeed, Lagarde, wanting to blunt any hawkish interpretation, dodged three subtle but important questions; 1 – why was that line included, and in the opening statement no less, 2 – why was the “could be more than enough” listed before the we can always do more, and 3 – did its inclusion reflect deliberations (i.e. some unease/dissent) within the Governing Council?

We suspect it will be a matter most likely of a few hours for enterprising ECB reporters to break with news that its inclusion was indeed a nod to the less dovish members, and the result of deliberations within a Council that reflect a skewed, and not “equal,” balance of risk as to whether in the fullness of time more, less, or the entire 1.85 trillion euros PEPP envelope is deployed.


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