Head of Macroeconomic Research
Summary: While the era of monetary dominance is likely come to an end, central banks all around the world are still coming up with new creative ways to try to improve monetary policy transmission and mitigate the side-effects of the current second pandemic wave. Recently, the Bank of Japan announced a special deposit facility to trigger a M&A wave in the banking sector while the RBNZ unveiled a new Funding for Lending programme to reduce banks' funding costs and reduce interest rates. Yesterday it was the turn of the ECB to send a strong and committing signal to the market in favor of new measures to cope with the virus and its economic consequences. Central bank innovation continues to avoid a lost decade.
Yesterday, at the Sintra virtual ECB Forum, Christine Lagarde delivered a powerful and committing introductory speech (see here the full transcript):
“The ECB was there for the first wave and we will be there for the second wave. We are, and we continue to be, totally committed to supporting the people of Europe” (November 11th).
The forum continues for a second day, with a special focus on falling natural rates, fiscal policy and financial instability. Lagarde, Powell and Bailey will participate as speakers to the panels this afternoon. You can follow the live session here.
Lagarde’s comments echoes the opinion of Vice Fed Chair Clarida :
“I can assure you that we are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust and rapid as possible” (October 14th – here the full transcript).
In further details, Lagarde provided important insights to market participants ahead of the December meeting. Here are the main takeaways:
In conclusion, we expect the following measures from the ECB next month:
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There are still some work to be done by the Committees but we have already a very clear and strong signal from Sintra indicating that all the options are on the table and that further support will be provided at the December meeting. Combined with positive vaccine news that are likely to pop up in the coming weeks (we are waiting for Moderna’s update on its vaccine), the continued central bank support will keep fueling expectations and positive mood in the market at least until year-end. Investors have already priced in bad economic data related to the re-imposition of lockdowns and we don’t see much risks ahead, with the exception of the risk of shutdown in December in the United States that might have a limited market impact if it materializes. No need to say that Brexit is not on your list, we still believe that in the next two weeks a bare bones free trade agreement will be reached between the United Kingdom and the European Union. Therefore, the market rotation into cyclical, value stocks and especially emerging market assets that has occurred since early November, with strong performance from Asian indexes and currencies, is only starting and more gains are coming.
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