As expected, the ECB left policy unchanged Thursday, as policymakers await more data to assess the effects of September’s actions, which included a rate cut and a controversial restart to net asset purchases – it was Mario Draghi’s final gift to markets.
Eyes are trained on Christine Lagarde, whose first press conference as ECB chief following the December meeting went well, all things considered. Lagarde – a consensus builder and a seasoned political operator – is tasked not just with prodding a recalcitrant core into considering fiscal stimulus, but also with presiding over the first serious strategy rethink in more than a decade and a half.
Between still stubborn inflation and tepid growth, “Japanification” has clearly set in across the bloc. The trade war and Brexit didn’t help. Lagarde struck an upbeat tone last month, perhaps hoping to instill a bit of confidence amid a nascent economic recovery. “There are some initial signs of stabilization in the growth slowdown and of a mild increase in underlying inflation”, she said, adding that “the risks surrounding the euro-area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside, but have become somewhat less pronounced”.
Thursday’s press conference was largely uneventful. Risks to the growth outlook were described as “less pronounced”, and Lagarde remarked that “incoming data point to some stabilization in growth dynamics”.
She flagged “some signs of a moderate increase in underlying inflation in line with expectations”. The euro briefly spiked to day highs, before retreating. By the time she finished speaking, the common currency was on the lows and one-month volatility hit a record nadir at 3.8075%.
Euro-area inflation rose at the briskest pace in eight months in December, according to the flash read. The 1.3% print matched consensus and brought the headline gauge in-line with core for the first time in months.
And yet, the 2% target remains largely elusive. The ECB is hardly alone in struggling to define its inflation objective in a world where structural forces have served to damp price pressures seemingly in perpetuity. The strategy review will look at a variety of options, and it comes on the heels of the Fed’s own review.
As for the bank’s toolkit to achieve the goals set out in the review, ammunition is obviously running low. Pretensions to mitigation via tiering and other schemes notwithstanding, September’s rate cut raised more alarms among critics of extraordinary monetary policy, and worries about the ill effects of negative rates will persist.
As for the restart of net asset purchases, more QE was the central point of contention at the September meeting, Draghi’s second-to-last.
European equities are near record highs, though.
So, at least there’s that. The “stawks” are happy, even if the hawks aren’t.
Details of the strategy review were released Thursday after the press conference. You can read the press release in full below. There’s nothing market-moving for now.
Full policy review statement
23 January 2020
- Review will encompass quantitative formulation of price stability, monetary policy toolkit, economic and monetary analyses and communication practices
- Other considerations, such as financial stability, employment and environmental sustainability, will also be part of review
- Expected to be concluded by end of 2020
- Review will be based on thorough analysis and open minds, engaging with all stakeholders
The Governing Council of the European Central Bank (ECB) today launched a review of its monetary policy strategy. The monetary policy strategy was adopted in 1998 and some of its elements were clarified in 2003.
Since 2003 the euro area and the world economy have been undergoing profound structural changes. Declining trend growth, on the back of slowing productivity and an ageing population, as well as the legacy of the financial crisis, have driven interest rates down, reducing the scope for the ECB and other central banks to ease monetary policy by conventional instruments in the face of adverse cyclical developments. In addition, addressing low inflation is different from the historical challenge of addressing high inflation. The threat to environmental sustainability, rapid digitalisation, globalisation and evolving financial structures have further transformed the environment in which monetary policy operates, including the dynamics of inflation.
In the light of these challenges, the Governing Council has decided to launch a review of its monetary policy strategy, in full respect of the ECB’s price stability mandate as enshrined in the Treaty.
“As our economies are undergoing profound changes, it is the time for a strategy review to ensure we deliver on our mandate in the best interest of Europeans,” said ECB President Christine Lagarde.
The Governing Council will take stock of how the monetary policy strategy has supported the fulfilment of the ECB’s mandate under the Treaty over the years and consider whether any elements of the strategy need to be adjusted. The quantitative formulation of price stability, together with the approaches and instruments by which price stability is achieved, will figure prominently in this exercise. The review will also take into account how other considerations, such as financial stability, employment and environmental sustainability, can be relevant in pursuing the ECB’s mandate. The Governing Council will review the effectiveness and the potential side effects of the monetary policy toolkit developed over the past decade. It will examine how the economic and monetary analyses through which the ECB assesses the risks to price stability should be updated, also in view of ongoing and new trends. Finally, it will review its communication practices.
The process is expected to be concluded by the end of the year. The Governing Council will be guided by two principles: thorough analysis and open minds. Accordingly, the Eurosystem will engage with all stakeholders.
Full January ECB statement
23 January 2020
At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
The Governing Council will continue to make net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
The Governing Council also decided to launch a review of the ECB’s monetary policy strategy. Further details about the scope and timetable of the review will be published in a press release today at 15:30 CET.
