MNI INTERVIEW: ECB Likely On Hold As Hawks Await Lagarde

By Luke Heighton

     FRANKFURT(MNI) - Further easing by the European Central Bank is unlikely, a

former deputy governor of the Central Bank of Ireland told MNI, pointing to a

depleted policy toolkit and the difficulty inexperienced President Christine

Lagarde would face overcoming opposition from hawkish members of the Governing

Council.

     Former ECB President Mario Draghi pushed through September's tiered rate

cut and relaunch of net asset purchases despite loud dissent from German and

Dutch central bankers. Former IMF chief Lagarde, who lacks training in

economics, might struggle to repeat the trick were she to be convinced of the

need for more easing, Stefan Gerlach said in an interview.

     "Jens Weidmann, Klaas Knot and other long-standing Governing Council

members who disagree with the ECB's stance will try to prevent more easing. They

know the background to the Governing Council's past easing decisions, and the

myriad of economic criteria and legal motivations used to justify and support

them," said Gerlach, now chief economist at EFG Bank in Zurich.

     "Not having been involved in these decisions will make it difficult for

Lagarde to overcome the opposition."

     Draghi insisted on September's measures "precisely because he felt that it

would be difficult for Christine Lagarde to forge agreement for more easing,"

Gerlach said.

     --EASING UNLIKELY

     While some investors are betting on further easing by the end of the first

quarter of 2020, Gerlach said this was unlikely.

     "I'd be very surprised if there was a 10 basis point interest rate cut by

March. If there was a sharp downturn in the euro area then of course the ECB

would ease policy, but, barring that, I don't think we'll have more easing."

     With its main policy rate already below zero and the limits to quantitative

easing drawing closer, Lagarde will continue Draghi's calls for more

expansionary fiscal policy from countries like Germany. In this, her experience

as a former French finance minister should prove an advantage, Gerlach said.

     "She knows how ministers of finance operate and will be more influential

among them than many other central bankers would be," he said. "She will make

the point that there is a lot of concern across the euro area about the ECB's

highly expansionary policy and about negative interest rates. But they are

necessary because fiscal policy is so tight. If finance ministers do not like

this, they have plenty of room to do something.

     "The fundamental situation is one in which the ECB's tools are almost

exhausted. If the euro area slips into recession, we will see more monetary

policy action, but overall I think it is unlikely that more easing will come. "

     The support of the ECB's chief economist, Philip Lane, will be critical to

Lagarde, whose deputy, Luis de Guindos, also lacked monetary policy experience

before taking on his job. The Irishman may join the ECB's post-meeting press

conferences, to answer technical questions, Gerlach said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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