ECB leaves policy unchanged

Agence France-Presse

Posted at Jan 23 2020 09:55 PM

FRANKFURT AM MAIN, Germany - European Central Bank chiefs left easy-money policy settings in place Thursday, leaving president Christine Lagarde to detail a rethink of its aims and methods and update her assessment of risks facing the eurozone.

At their meeting in Frankfurt, governors left interest rates at historic lows and maintained "quantitative easing" (QE) bond-buying purchases, a spokesman said.

What's more "the governing council also decided to launch a review of the ECB's monetary policy strategy," he added, promising more details later Thursday.

At her first press conference as ECB chief last month, Lagarde vowed to "turn each and every stone" in the planned probe.

Slated to finish this year, the rethink is slated to look above all at the ECB's just-below-two-percent inflation goal and the tools the bank should use to achieve it.

The institution's last stock-taking in 2003 took place several years before it intervened massively in inter-bank markets amid the global financial and economic crisis.

At Lagarde's 2:30 pm (1330 GMT) press conference, observers will be on the lookout for information on the review and any small changes in language regarding economic risks, after several weeks of mostly positive political tailwinds for the economy.

This year marks a new phase for her presidency, after its early months were spent smoothing divisions among policymakers that erupted under predecessor Mario Draghi.

"The most important part of the review will be an assessment of the definition of price stability and how to reach it," said economist Carsten Brzeski of ING bank.

For most of its active life, the ECB has aimed for inflation "close to, but below two percent" to fulfill its mandate to keep eurozone prices stable.

But over the past seven years, it has failed to achieve that goal despite unprecedented policy experiments.

One option would be to simply target inflation "around" two percent.

Such "symmetry" in the inflation target could mean the bank would not immediately hit the brakes once inflation approaches two percent, instead potentially allowing it to overshoot a bit.

That "would allow the ECB to actually take it easy" and stick to its present negative interest rates for longer, Brzeski said.

What's more, "such a clarification of the target would be helpful... to limit disagreement in the governing council," added Goldman Sachs chief economist Alain Durre.

On top of the ECB's headline goal, the review could also tackle issues like making decisions more consensual, side effects of policy tools like bond-buying and negative rates, and how to take climate change into consideration.

Lagarde has identified climate action as a new frontier for central banking, including via its bond-buying scheme and bank supervision role, while retaining price stability as the ECB's primary mandate.

The ECB chief's judgment of risks facing the euro area will also be closely scrutinized Thursday.

Lagarde suggested in December that dangers have become "less pronounced", a nuance quickly picked up on by financial markets.

Since then, signs of clouds beginning to clear over the global economy have multiplied, including prospects for an orderly British exit from the EU at the end of January.

The International Monetary Fund -- Lagarde's old patch -- this week pointed to a "moderate pick-up in global growth" ahead, although "policy missteps" could still derail it.

And the US-China trade conflict, with its harmful knock-on effects on Europe, has been soothed for now by a new trade deal.

On Wednesday however, President Donald Trump leveled new threats of car import taxes against the EU.

"I wanted to wait till I finished China" before targeting Europe, he told reporters at the World Economic Forum in Davos, Switzerland.

For now, analysts suspect a slowdown in eurozone manufacturing might be bottoming out, while inflation picked up slightly last month to an annual rate of 1.3 percent.

"We expect the ECB to acknowledge these developments with a more upbeat risk assessment," Goldman Sachs economist Durre said.

Nevertheless, some economists predict the ECB will lower rates further this year if no pickup in growth and inflation is forthcoming.

Meanwhile, QE is expected to continue at 20 billion euros ($22 billion) worth per month well into 2020.