Market Comment: Hawks and doves: changes at the ECB

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By the end of next year, four of the six members of the European Central Bank’s Executive Board will have been replaced – including President Mario Draghi. In this interview, Mary Pieterse-Bloem, ABN AMRO Global Head of Fixed Income, looks ahead to the impact of these changes for investors.


The ECB Executive Board comprises the President, the Vice President and four members, including the Chief Economist. This Board, together with the governors of the national central banks of the 19 euro-area countries form the Governing Council, which is responsible for ECB monetary policy. Terms on the Executive Board are staggered, so that transitions are gradual. The members of the Executive Board have permanent voting rights, while voting rotates within the Governing Council.

Four of the Executive Board members’ terms will end over eighteen months beginning on 31 May 2018, when the term of the current ECB Vice President, Vítor Constâncio, expires. Last week, it was announced that Luis de Guindos, Spain’s Minister of Economy and Competitiveness, had been recommended to replace him. The next opening is when the term of the Chief Economist, Peter Praet expires in May 2019, followed by the ending of Mario Draghi’s reign as president on 31 October 2019 and Benoît Cœuré’s term terminating on 31 December 2019.

Will the upcoming changes at the ECB affect ABN AMRO’s investment strategy?

The effect on our strategy depends on whether the personnel changes materially affect the ECB’s monetary policy stance. Economists tend to look at the balance between ‘hawks’ and ‘doves’ when evaluating such shifts.

A hawk is a governing council member who tends to react to any sign of inflation more quickly than a dove. Inflation is in focus because price stability and maintaining inflation rates below, but close to, 2% is the ECB’s primary objective. A dove would react much more slowly to signs of inflation than a hawk.

This is important because the ECB is about to embark on a normalisation of its monetary policy. They are on a slow path to more ‘normal’ interest rates in historical terms. The first step will be the withdrawal of their asset purchasing programme (quantitative easing), followed by the removal of the current negative short-term interest rate policy.

Under Draghi and his current council, they have been taking this rather slowly. So, if the council would tilt more towards the hawks, then the pace of the normalisation process could pick up some speed. In a market environment which is already on edge regarding the impact of higher inflation, this could lift rates more quickly. Our investment strategy would be impacted if we expect that this will occur.

Do you have a view on the policy effects of Draghi leaving and being replaced by Philip Lane, who is cited by some as a front-runner?

Philip Lane is more of a centrist, holding the middle ground between doves, such as Draghi, and hawks, such as Jens Weidman, the current Bundesbank president. Weidman is also seen as a credible contender for Draghi's seat.

You should not expect a very dramatic change from the current policy if Philip Lane takes the helm, given that he is known as a pragmatist who sticks to the center. We have seen this in his views as a current ECB Council member. The more material change would come from Weidman, who could push the ECB to a more pro-active policy line. It is precisely for this reason that we think that he will not be the next ECB President. But it is still early in terms of this appointment and premature to position our bond portfolio around such an event.

How will fixed income markets handle the upcoming announcements?

Last week we had the announcement that Guindos is going to replace Constancio [1]. So here again, the question arose whether Guindos is more hawkish or dovish than his predecessor. The trouble with Guindos is that we have little way of knowing, given that he has no central banking experience. The market perceives him, however, to be more on the hawkish side. This view is based on comments he has made, such as referring to quantitative easing as a temporary tool. But his stance needs to be seen in practice.

Given that Guindos will not begin with the ECB until June and the other changes in the Executive Board all occur in 2019, we expect little effect to be seen in fixed income markets in the short term. And, indeed, there was no reaction to the nomination of Guindos. We remain positioned for bond yields to rise and believe that it could still be some time before core eurozone government bonds are again attractive. But we did signal last week that Italian government bond yields presented an opportunity for investors, as the eurozone periphery is benefiting from the strength of the economic recovery and the formation of governments in France and Germany that support the EU.

Mary Pieterse-Bloem, Global Head Fixed Income, Global Investment Center

[1] For more information, read "De Guindos set to be ECB VP" published by ABN AMRO Group Economics, 19 February 2018.