Lagarde Faces New ECB Revolt As Hawks, Doves Feud Over Virus Response

Moments ago, ECB president Christine Lagarde confirmed again that the European Central Bank remains generally helpless to boost growth in a world in which it unleashed negative rates, sending European banks to all time lows last week, and where the second wave of Covid cases means the ECB has no visibility into the future:

  • “Businesses are facing difficulties, people are losing their jobs, and prospects about the future remain uncertain,” European Central Bank President Christine Lagarde says in European Parliament, adding that the ECB “will carefully assess all incoming information, including developments in the exchange rate, with regard to its implications for the medium-term inflation outlook”

  • “[The ECB] continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry”

  • Strength of the recovery remains “highly dependent on the evolution of the COVID-19 pandemic and the success of containment policies. The public health crisis will continue to weigh on economic activity and poses downside risks to the economic outlook”

  • Declines in energy prices, stronger euro, temporary reduction in the value- added tax rate in Germany will weigh on inflation in the coming months

What is more notable is that earlier today, the ECB lobbed another trial balloon via its favorite media outlet, Reuters, in which we read that a new mutiny may be forming within the ECB, where the doves find Lagarde not dovish enough, while the hawks demand a prompt retraction of the massive liquidity stimulus that has been unleashed in recent months:

  • ECB HAWKS WANTED IN SEPT TO QUIETLY REDUCE THE PACE OF PEPP BOND PURCHASES, OBJECTED TO PROJECTIONS EXCLUDING KEY FISCAL MEASURES - SOURCES

  • ECB DOVES OBJECT TO LAGARDE'S TIMID LANGUAGE ON EURO STRENGTH, GROWTH RISKS, SOURCES SAY

The full Reuters article details the growing divisions among the ECB's ranks according to eight ECB insiders, who write that "policymakers are increasingly divided over how to steer the economy through a second wave of COVID-19, threatening President Christine Lagarde’s hard-won peace."

"Some of the sources, who spoke on condition of anonymity, especially objected to ECB board member Fabio Panetta’s comments last week that the ECB should err on the side of doing too much rather than too little."

As Reuters adds, the former IMF head had managed to end the public infighting that left the ECB in disarray in the final months of Mario Draghi’s tenure last year and she has "seamlessly pushed through several record stimulus packages to keep the economy afloat amid the pandemic." Furthermore, her pledge to seek consensus and bring sceptics onboard was in stark contrast to her predecessor Draghi, who rarely engaged key opponents of his policies and signaled moves even before any discussion within the Governing Council.

Alas, the good times now are ending.

To those familiar with the infighting within the ECB, these divisions are hardly a surprise – as Citi's dove-hawk scale below shows, the median of the ECB is in the distinctly dovish camp but there are many outliers, with Knot, Weidmann and Holzmann the biggest hawks, although their complaints have been more muted recently.

And while this trial balloon hints that we will see more open dissent in the coming weeks, for now this internal division mean little for EUR, which trades at 1.1670, higher on the day thanks to the overnight USD drop.

Meanwhile, as some desks note, with the more recent decline in the EUR, the market focus will be on what the ECB could do to support markets rather than the euro appreciation. Furthermore, ahead of the December meeting, the ECB should follow up with some further guidance on asset purchases, including a potential extension of the PEPP, leading to even more anger among the few remaining hawks.