Markets Welcome Christine Lagarde’s First ECB Policy Meeting

Bank stocks and government bonds reacted positively to Christine Lagarde’s first policy decision as President of the European Central Bank, taking their cue from her slightly more optimistic comments about growth in the eurozone.

The ECB kept interest rates unchanged at minus 0.5% and made no other policy adjustments: The press release announcing the decision was almost word-for-word identical to the one issued after Mario Draghi’s last rate-setting meeting as president in October.

Markets, however, embraced her tone. German 10-year government bond yields rose 0.05 percentage point to minus 0.268% to put them on course for their highest closing level in a month. Yields rise when investors expect better economic growth and higher interest rates in the future.

Bank stocks also rose with the Stoxx Europe 600 ex UK Banks Index up nearly 3% as weaker banks in particular rallied.


of Germany was up 5%, while Spain’s



Banco de Sabadell[3]

were both up 4.6%.

Updated forecasts from the ECB showed eurozone inflation still falling short of its target by the end of 2022, which Ms. Lagarde said wasn’t satisfactory. However, she said that Europe’s slowing growth was showing signs of stabilization and there had been a mild increase in underlying inflation.

Investors are trying to work out whether Ms. Lagarde’s economic views make her more likely to loosen monetary policy, or tighten it by stopping bond purchases and raising interest rates in the future. These are often called dovish, or hawkish tendencies.

Ms. Lagarde said at her first press conference that she was neither a dove nor a hawk, but wanted to be like a wise owl. Many investors still expect her to have to loosen policy further, eventually, to solve Europe’s stubbornly low inflation.

“We suspect the owl might have to graduate into a dove, eventually,” said

Fred Ducrozet,

strategist at Pictet Wealth Management. “The ECB is still dovish on balance in my opinion and, as expected, is setting the stage for a pause.”

Investors appeared to be giving Ms. Lagarde the benefit of the doubt, he added, although a tweet from U.S. President Donald Trump suggesting that a trade deal with China was close also gave markets a boost in the hours after the press conference.

Ms. Lagarde took the helm of the ECB amid criticism of its negative interest-rates policy, especially from Dutch and German policy makers worried about side effects on banks and savers. Many in markets felt that cut the chances of additional easing.

But Ms. Lagarde’s focus on the weak inflation forecasts led some to conclude more ECB stimulus could come in 2020.

Elga Barscht,

head of economic and market research at BlackRock Investment Institute, said that there now appears to be a “chance of a small easing.”

Investors and analysts also wanted a better sense of Ms. Lagarde’s leadership style, and several thought she had demonstrated a strong understanding of economics and markets. Some observers believe the former lawyer and head of the International Monetary Fund is likely to rely on the ECB’s chief economist, Philip Lane, in much the same way as Federal Reserve Chairman Jerome Powell relies on the expertise of Vice Chairman Richard Clarida.

“In the U.S., the market doesn’t look at Powell; it looks at Clarida. I think in Europe, people will look more to Philip Lane,” said

Helen Thomas,

founder of independent U.K.-based research firm, Blonde Money.

Mr. Lane, who hails from Ireland, should also help ensure that Ms. Lagarde isn’t swayed by more powerful voices within Europe. “He’s not from France or Germany or one of the politically more powerful countries, so they shouldn’t end up having too much influence on Lagarde,” Ms. Thomas said.

1 2