ECB View: Liikanen a centrist with a dovish tilt – According to a Bloomberg survey of economists, Erkki Liikanen is the new favourite to replace ECB President Draghi in November of next year (see here). He takes over the front-runner tag from Bundesbank President Jens Weidmann, whose candidacy is now judged to be less likely following news reports that securing the ECB Presidency was not the priority for the German government in the upcoming European jobs merry-go-round. We think the likelihood of Mr Weidmann becoming the next ECB President is low simply because he is a hawk who has opposed many of the ECB’s policies over the last few years.
So how likely is a Liikanen presidency and what would it mean for the ECB’s monetary policy going forward? We would assign a high chance of a Liikanen presidency. He has a rich background in economic policy making, as the Finnish finance minister, European Commissioner and most recently Governor of the central bank of Finland (his term ended in July). In addition, he is widely seen as centrist and a pragmatist and is from a northern eurozone member state. That combination may make him acceptable to a large number of countries.
Having said that, it is early days, and there are other possible candidates. In the Bloomberg poll, Mr Liikanen is closely followed by two other centrists: the French central bank Governor Francois Villeroy and Irish central bank Governor Philip Lane. We would add another centrist – Benoit Coeure into the mix. Messers Villeroy and Coeure may suffer from the fact that the President before Mr Draghi was French. Mr Coeure may need to overcome legal hurdles because he is currently an Executive Board member, though we judge that these are not insurmountable. Finally, Mr Lane seems to be earmarked for the Chief Economist post, which becomes vacant in June of next year.
A Liikanen presidency may not be hugely different from the Draghi one in terms of the ECB’s monetary policy reaction function. Although Mr Liikanen is seen as a centrist, if anything he has a dovish tilt. Indeed, his commentary on monetary policy has not differed that much from Mr Draghi’s over the last couple of years. He seems to be supportive of the policy measures taken and has preached a slow and careful exit. In addition, he has stressed the symmetry of the ECB’s inflation goal. For instance, last year he said in a speech that ‘if the starting point is that inflation is near but under 2 percent, it’s only possible if we accept that at times it can exceed that 2 percent level. I think it’s a simple matter.’ A lot will also depend on who takes the Chief Economist post. A Liikanen-Lane combination could mean there is relative continuity. On the other hand, if Ardo Hansson – the Estonian central bank Governor – gets that job, a more hawkish shift could follow. (Nick Kounis)
Fed View: Williams supports continued gradualist approach to tightening – New York Fed President John Williams commented on his latest macro and policy views today in a Q&A session. He struck a very centrist tone, supporting the case for continued gradualism in the Fed’s tightening approach. While sounding upbeat on the US economy, he nonetheless characterised low wage growth as ‘still a bit of a puzzle’, and that this indicates the economy ‘still has room to run’. Unlike his more dovish peers (see here), however, he did not imply this meant an end to rate hikes is in sight, but rather that there is ‘no need to hike more quickly than otherwise’, and that ‘we’re on a good path of gradually raising rates’. All told, the comments support our view a continued quarterly pace of rate hikes. We continue to expect four more 25bp hikes, taking the target range for the fed funds rate to 2.75-3.00% by next June. (Bill Diviney)