ECB to launch review that will redefine its mission and
tools
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[January 23, 2020] By
Francesco Canepa
FRANKFURT (Reuters) - European Central Bank
President Christine Lagarde is set to launch a broad review of its
policy on Thursday that is likely to see her redefine the ECB's main
goal and how to achieve it.
The euro zone's central bank has fallen short of its inflation target of
just under 2% for years despite increasingly aggressive stimulus
measures under Lagarde's predecessor, Mario Draghi.
ECB rate-setters are not expected to make any policy change this week
but simply stand by their pledge to keep buying bonds and, if needed,
cut interest rates until price growth in the euro zone heads back to
their goal.
Lagarde will, however, announce the start and scope of the ECB's first
strategic review since 2003, which will last for most of the year and
span topics from the inflation target to digital money and the fight
against climate change.
Investors will be looking for clues to whether the review will see
Lagarde cement her predecessor's legacy of monetary largesse, or if she
will use it to acknowledge worries that years of easy credit have fueled
financial bubbles.
"(Thursday's) meeting will be important in assessing whether the aim of
reconsidering the inflation target has retained the dovish motivation
focus that Draghi had tried to give it," said Greg Fuzesi, an economist
at JP Morgan.
The ECB will announce its monetary policy decision at 1245 GMT and
Lagarde will hold her second news conference as the central bank's chief
from 1330 GMT.
The euro <EUR=>, at $1.1083, was hovering just above a one-month low
against the dollar early on Thursday while Asian stocks tumbled on
worries about the spread of a new flu-like virus in China.
TARGET
Changing the ECB's formulation of price stability -- currently defined
as an annual inflation rate below, but close to, 2% over the medium term
-- will be the focal point of the review.
The ECB could signal its commitment to boosting inflation by raising the
goal to 2% and spelling out that it will take any undershooting just as
seriously as an overshoot.
"Our inflation target must be symmetric. If the central target is seen
as a ceiling, we have less a chance of meeting it," ECB policymaker
Francois Villeroy de Galhau said recently.
But policy hawks on the Governing Council, who have long called for the
ECB's money taps to be shut off, will not go down without a fight.
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Specialists work on a crane in front of the European Central Bank (ECB)
in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski
Some of them favor creating a tolerance band around 2%, which would lower
pressure on the ECB to act, while others would leave the target unchanged or
even cut it.
Rate-setters will also debate the pros and cons of their tools, such as sub-zero
rates and massive bond purchases, which have been credited with staving off the
threat of deflation but at the cost of an unprecedented rise in house and bond
prices.
The ECB regularly lauds those instruments, recently estimating that without
them, the euro zone economy would have been 2.7 percentage points smaller at the
end of 2018.
But minutes of the December meeting show growing discomfort about their side
effects. That led to calls by some policymakers to give housing costs greater
weight in inflation calculations and take into account households' perceptions
of price growth, which is generally higher than official figures.
POLICY ON HOLD
While these matters are addressed, the ECB is expected to leave its monetary
policy on hold.
That would leave it buying 20 billion euros ($22.16 billion) worth of bonds
every month and charging banks 0.5% on their idle cash for most of the year.
"While the ECB reviews its strategy, we see no change in policy settings,"
economists at Morgan Stanley wrote in a note.
Euro zone data has improved recently, leading economists to believe the
export-focused economy has weathered the storms of the global trade war.
Furthermore, a trade deal between the United States and China, and the prospect
of an orderly Brexit are lessening the two main risks the ECB had said were
clouding the horizon.
But the outlook for euro zone growth and inflation remains lukewarm, meaning the
ECB is likely to strike a cautious tone by reaffirming its warning about
"downside risks" to the economy.
"It is likely too early to sound the all-clear, or change the risk assessment to
'balanced'," Societe General economist Anatoly Annenkov said.
(Reporting by Francesco Canepa; Editing by Catherine Evans)
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