ECB starts revising its mission and instruments
European Central Bank left interest rates unchanged on Thursday.
ECB Mission Statement
In its first rate decision for the year, the Board of Governors of the European Central Bank (ECB) voted unanimously to keep the base deposit rate at a historic low of -0.5% in line with market expectations. Margin credit line remained at 0.25%, while the rate on major refinancing operations remained at 0%.
In an accompanying statement, the ECB confirmed that rates will remain at or below their current level as long as inflationary trends «will unswervingly converge» at a level close, but below 2%.
The ECB launched a sweeping policy review, during which new President Christine Christine Lagarde is likely to define the main goal of the ECB and how to achieve it.
The eurozone's central bank has fallen short of its inflation target of just under 2% for years, despite increasingly aggressive stimulus measures Mario Draghi, Lagarde's predecessor.
On Thursday, ECB leaders did not make any changes to their policies, only upheld their pledge to continue buying bonds and, if necessary, cut interest rates until prices in the euro area return to target levels..
However, they announced the start of the ECB's first strategic policy review since 2003, which will last most of the year and will cover topics from inflation targeting to digital money and the fight against climate change..
«The Governing Council also decided to start a review of the ECB's monetary policy strategy», – said in a statement by the ECB.
Lagarde was expected to provide more details on the scope of the review at his second press conference..
Investors will be looking for clues as to whether Lagarde will leverage Draghi's legacy with its monetary bounty, or whether she will heed concerns that years of easy lending have created financial bubbles..
«The meeting (on Thursday) will be important in assessing whether the target of the revised inflation target has retained the same “pigeon” the mood that Draghi tried to give him», – said Greg Fuzesi, economist at JP Morgan.
Euro hovered around 1.1085 against US dollar on Thursday following ECB announcement.
While these issues are being resolved, the ECB is expected to continue its monetary policy.
This would allow the regulator to add 20 billion euros ($ 22.16 billion) of bonds to its 2.6 trillion euros portfolio every month and borrow 0.5% of their free money from banks for most of the year..
«The Governing Council expects the ECB's key interest rates to remain at or below their current level until it is clear that the inflation forecast is steadily approaching close enough, but below 2%», – said the ECB.
Eurozone data has improved recently, leading economists believe export-oriented economy has weathered the storms of world trade war.
In addition, the trade deal between the United States and China and the prospect of an orderly Brexit mitigate two major risks that the ECB says cloud the horizon..
But the outlook for eurozone growth and inflation remains sluggish, which means the ECB is likely to sound cautious in reaffirming its warning about «downside risks» for the economy.
«It is probably too early to voice full clarity or change the risk assessment to ”balanced”», – says Anatoli Annenkov, chief economist at Societe Generale.
The rewording of ECB price stability – currently defined as lower annual inflation, but close to 2% in the medium term – will be the focus of policy revisions.
The ECB can declare its commitment to raising inflation by raising the target to 2% and explaining that it will take any negative impact as seriously as exceeding.
«Our inflation target should be symmetrical. If the central goal is seen as a ceiling, we are less likely to achieve it.», – said recently ECB spokesman Francois Villeroy de Galhau (Francois Villeroy de Galhau).
But the political hawks on the Board of Governors, who have long called for a tighter ECB monetary policy, will not collapse without a fight..
Some of them prefer to create a tolerance band of around 2%, which will reduce the pressure on the ECB, while others want to keep the target unchanged or even cut it..
Betting developers will also discuss the pros and cons of their instruments, such as sub-zero rates and massive bond purchases, which were geared towards staving off the threat of deflation, but at the cost of unprecedented increases in house and bond prices..
The ECB regularly praises these instruments, recently estimating that without them the eurozone economy would have been 2.7 percentage points smaller at the end of 2018..
However, the December meeting minutes show growing discomfort about their side effects. This has led to calls by some monetary policymakers in the euro area to give house prices more weight in inflation calculations and take into account household perceptions of price increases, which tend to be higher than official figures..