Eurozone Monetary Policy December 2019

Eurozone

Eurozone: Lagarde follows in Draghi's footsteps in her first ECB meeting

December 12, 2019

The European Central Bank (ECB) made no changes to its monetary policy on 12 December, 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 that its asset purchase programme (APP) was resumed on 1 November, at a pace of EUR 20 billion per month, and will last for as long as is deemed necessary. The meeting marked the first chaired by the new ECB President Christine Lagarde, who replaced Mario Draghi on 1 November.

Protracted economic slack and stubbornly low inflation, which led the ECB to unveil stimulus at its September meeting, prompted the Bank to hold its ground in November. An unsupportive and volatile external backdrop has hit the export-oriented manufacturing sector and restrained investment in the Eurozone economy. In the accompanying press conference, Lagarde pointed to incipient signs that the Eurozone slowdown was stabilizing and slightly less pronounced downside risks thanks to easing U.S.-China trade tensions. That said, the ultraloose monetary stance of the ECB has not translated into significant economic gains, thereby reinforcing criticism from part of the ECB’s monetary policy committee, which is concerned about its negative effects on the banking system and as it de facto subsidizes profligate governments in the Euro area.

Looking ahead, the former head of the IMF 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, reiterating the advice of her predecessor, she urged Eurozone countries with fiscal space to adopt expansionary policies to boost growth, and called on governments to push ahead with the implementation of structural reforms. Lagarde also reiterated her plans for a strategic review of ECB policy, which is due to start in January and finish before the end of the year. The review is meant to examine the effectiveness of the Bank’s monetary policy tools, including the most controversial ones such as negative interest rates and large-scale bond purchases, and will also try to assess how they can be used to tackle climate change and the way they affect inequality.

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

“All in all this was a very entertaining press conference with a self-proclaimed monetary policy owl. As regards the short-term outlook for monetary policy, further easing seems to be off the table, at least with the current macro projections, and wait-and-see looks the way forward. For ECB watchers and financial market participants, however, learning how to read Christine Lagarde will take some time. Today, at least we had the impression that it was not always clear whether Lagarde spoke on behalf of herself or on behalf of – at least the majority of – the ECB’s Governing Council.”

All of our panelists project the refinancing rate to remain at 0.00% next year.


Author: Massimo Bassetti, Senior Economist

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Eurozone Monetary Policy Chart


Euro Area Monetary Policy December 2019

Note: ECB Refinancing Rate in %.
Source: European Central Bank (ECB).


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