ECB keeps generous stimulus unchanged in Lagarde's first meeting

[December 12, 2019]  By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) - The European Central Bank kept its ultra-easy monetary policy unchanged at Christine Lagarde's first meeting in charge on Thursday, even keeping the door open to more stimulus while the bank gears up for a broad review of its operations.

With the euro zone economy barely growing amid a manufacturing recession, the ECB has already approved more support for the 19-member currency zone. That gives Lagarde time and space to settle in before another policy revamp needs to be considered.

While this stimulus works its way through to the economy, Lagarde, who took over Europe's most powerful financial institution on Nov. 1, has promised a rigorous assessment of how the ECB does business, weighing fundamental issues like changing the inflation target and how to fight climate change.

The review, due to start early next year and mirror a similar endeavor under way in the United States, comes as monetary policy is on auto pilot and financial markets are sanguine, allowing policymakers on both sides of the Atlantic to contemplate longer-term issues.

Financial analysts see the ECB on hold throughout next year, a view that only strengthened by the Federal Reserve signaling on Wednesday that it was unlikely to touch interest rates in 2020.

The former International Monetary Fund chief's first policy decision did nothing to dispel those expectations.

The ECB held its deposit rate at a record low minus 0.5% while keeping the option of another rate cut firmly on the table. It also promised low interest rates for an extended period and kept the pace of bond purchases, aimed at lowering borrowing costs, steady at 20 billion euros a month.

Attention now turns to Lagarde's 1330 GMT news conference, during which she is expected to fully reaffirm her predecessor's policy stance, arguing that risks remain tilted to the downside and any recovery in growth and inflation will take years.

She will also unveil fresh economic projections, which are likely to show that inflation in 2022 will still undershoot the ECB's target of almost 2%, even if prices are expected to rise steadily after bottoming out next year.

 European Central Bank's President Christine Lagarde arrives at the ECBs headquarter in Frankfurt, Germany, November 4, 2019. REUTERS/Ralph Orlowski

The euro <EUR=> was just below a two-month high against the U.S. dollar at $1.130 after the ECB's decision.

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With policy unlikely to change for much of next year, focus is already shifting to what the policy review is likely to yield and how Lagarde's mission to build a consensus could heal a recent rift in the Governing Council.

The world economy has changed since the ECB last did such a deep dive in 2003, with the neutral interest rate now sharply lower and under sustained downward pressure from an ageing population. Inflation is meanwhile barely responding to rising employment and central bank money printing, throwing widely accepted principles of central banking into question.

"The scope of the strategy review may not be finalised before early 2020, but it should be centered on four main issues: the definition of price stability and the inflation measures; the side-effects of unconventional policy measures; the internal and external communication strategy; climate risks," said Frederik Ducrozet at Pictet Wealth Management.

Lagarde is likely to wait until Isabel Schnabel and Fabio Panetta join the ECB's board on Jan. 1 before agreeing to terms of the review.

The new boss is also likely to be asked about the ECB's efforts to set up a digital currency. While the bank has long studied the issue, a recent private sector effort to launch a so-called digital stablecoin has increased the urgency.

The ECB is likely to say that the priority should be setting up a euro-zone-wide payments system to compete with overseas providers, but that its role should be limited to supporting private sector efforts.

(Reporting by Balazs Koranyi; Editing by Catherine Evans)

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