Monetary Policy January 2019

ECB keeps ultra-loose policy stance intact at first 2020 meeting; Lagarde launches strategic review

The European Central Bank (ECB) made no changes to its monetary policy on 23 January, keeping in place a stimulus package unveiled in September. Accordingly, the ECB kept the refinancing rate at a record low of 0.00%, the deposit rate at minus 0.50% and the marginal lending rate at 0.25%, as had been expected. The ECB also confirmed it will continue with its asset purchase program (APP), which was resumed on 1 November, at a pace of EUR 20 billion per month, and will last for as long as is deemed necessary.

Soft economic momentum and below-target inflation, which led the ECB to unveil stimulus at its September meeting, prompted the Bank to hold its ground in January. HICP inflation accelerated in December, mainly due to stronger energy price pressures, and measures of underlying inflation are also pointing to a moderate pick-up. However, inflation remains below the ECB’s target of “close to, but below, 2%”. Moreover, GDP growth gained only modest steam in Q3, again weighed down by weak external demand affecting both the manufacturing sector and investment decisions. Growth dynamics are showing signs of stabilization, as healthy wage growth and employment gains are underpinning consumer spending, while financing conditions support credit extension; however, geopolitical uncertainty, protectionist temptations and vulnerabilities in emerging markets keep risks tilted to the downside.

Looking ahead, President Lagarde stated that the ECB will keep key interest rates “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”. Moreover, she once again urged Eurozone countries with fiscal space to adopt expansionary policies to boost growth, advised fiscally troubled countries to pursue prudent policies and called on governments to push ahead with the implementation of structural reforms. Lagarde also confirmed the Governing Council of the ECB launched a strategic review of ECB policy, which is due to finish before the end of the year. The review is meant to examine the quantitative formulation of price stability and the effectiveness of the Bank’s monetary policy tools, including the most controversial ones such as negative interest rates and large-scale bond purchases. It will also analyze the possible side effects of the broad array of unconventional monetary policy operations adopted over the last few years, taking into account how climate change, financial stability and employment can affect ECB’s policy and goals.

Commenting on what to expect from Lagarde, Carsten Brzeski, chief Germany economist at ING, elaborates:

“Unless there’s a severe economic accident, the best we can expect from the upcoming ECB meetings this year could be a dropping of the easing bias and possibly hints at an end to QE. Judging from Lagarde’s comment at the press conference, however, a substantial change of the ECB’s monetary policy, including forward guidance, before the end of the strategy review looks unlikely. Binge-worthy and nail-biting ECB meetings will otherwise not return before the end of the strategy review.”

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