The reopening ceremony for the Notre Dame cathedral in Paris over the weekend drew everyone from European princes to the US president-elect – securing more favourable headlines for French president Emmanuel Macron than he’s been used to of late.
Also among invited guests, taking shelter from stormy weather beneath the church’s rebuilt roof on Saturday evening, was one-time French finance minister, Christine Lagarde.
As European Central Bank (ECB) president, Lagarde has had more than a passing interest in developments in her home country of late, with France’s borrowing costs blowing out – relative to Germany – as Macron’s gamble on a snap election in June backfired, leading to months of political chaos, culminated in the collapse of his government last week.
To date, Lagarde has gotten away with saying as little as possible when asked about France’s problems and the prospect of the ECB stepping in and buying its bonds to ease market turbulence. The bar is high. It could only be triggered – under the ECB’s own rules – to “counter unwarranted, disorderly market dynamics”. Neither currently applies in this case.
However, there is a growing view that the French crisis, combined with political turmoil in Germany – which faces an early election in February following the collapse of chancellor Olaf Scholz’s coalition – weakening euro zone business activity and the threat of US tariffs after Donald Trump’s re-election in the US, will persuade the ECB governing council to strike a more dovish tone after it meets this week. Especially when inflation seems to be falling at a faster pace than expected. In central bank circles, dovish implies being in favour of rate cuts.
A 0.25 of a percentage point rate cut – the fourth in since June – is all but locked in for Thursday at this stage, according to economists. It would bring the ECB’s deposit rate to 3 per cent.
“We expect a dovish shift to the [ECB] statement,” said HSBC economist Fabio Balboni. “We think that aiming to ‘keep policy rates sufficiently restrictive for as long as necessary’ could be replaced by something like an intention to ‘remove restriction gradually’.”
Deutsche Bank’s chief European economist Mark Wall agrees. “We expect the doves and hawks to compromise on a mildly dovish evolution of ECB communications,” he said.
Financial markets are already one step ahead. They are currently pricing in the ECB deposit rate falling to 1.75 per cent by the end of next year.
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