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ECB holds rates as strategic review gets underway

ECB holds rates as strategic review gets underway

January 23, 2020 09:48
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Home » ECB holds rates as strategic review gets underway

ECB holds rates as strategic review gets underway

by FWNews
January 23, 2020 09:48
in Rates
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ECB holds rates as strategic review gets underway

The European Central Bank (ECB) on Thursday held interest rates steady as it launched its first strategic review since 2003, in a bid to establish whether its inflation target is still appropriate.

In its first rate decision of the year, the central bank’s Governing Council voted unanimously to keep the main deposit rate at a historic low of -0.5%, in line with market expectations. The marginal lending facility remained at 0.25% and the main refinancing operations rate stayed at 0%.

In a press conference following the decision, ECB President Christine Lagarde said rates will “remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below 2% within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”

Lagarde added that the Governing Council “stands ready to adjust all of its instruments as appropriate” in order to guide inflation towards target.

Net asset purchases as part of the quantitative easing program started in November at a monthly rate of 20 billion euros ($22.3 billion), and the ECB reiterated on Thursday that this will continue to run “as long as necessary” to reinforce the accommodative policy stance.

Review to conclude in 2020

The strategic review launched Thursday was one of the first moves announced by Lagarde upon starting her tenure, with the central bank’s persistent low interest rate stance under fire from market participants who say it has become detrimental to economic growth.

In a press release on Thursday afternoon, the ECB revealed that the review will be concluded by the end of 2020, and will encompass “quantitative formulation of price stability, monetary policy toolkit, economic and monetary analyses and communication practices.”

It will also assess financial stability, employment and environmental sustainability, and will be based on “thorough analysis and open minds, engaging with all stakeholders.”

In September last year, Lagarde’s predecessor Mario Draghi cut the ECB’s deposit rate by 10 basis points to its current level and launched a massive new QE program in a bid to stimulate the euro zone economy and push towards the central bank’s inflation target.

Lagarde inherited an inflation rate of 1.0% in the euro zone upon taking the reins in November.

“Declining trend growth, on the back of slowing productivity and an ageing population, as well as the legacy of the financial crisis, have driven interest rates down, reducing the scope for the ECB and other central banks to ease monetary policy by conventional instruments in the face of adverse cyclical developments,” the ECB said.

It added that the “threat to environmental sustainability, rapid digitalization, globalization and evolving financial structures” have further transformed the monetary policy environment, including inflation dynamics.

Risks ‘tilted to the downside’

Lagarde told the press conference on Thursday that the risks surrounding the euro area growth outlook “related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets remain tilted to the downside, but have become less pronounced as some of the uncertainty surrounding international trade is decreasing.”

Inflation is expected to increase over the medium term, but she reiterated that other policy areas must “contribute more decisively” in order to “reap the full benefits” from the ECB’s accommodative policy measures.

“The implementation of structural policies in euro area countries needs to be substantially stepped up to boost euro area productivity and growth potential, reduce structural unemployment and increase resilience,” Lagarde added.

Source: CNBC
Tags: Christine LagardeECB
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