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MNI POLICY: Signs of Improvement, ECB Policy Unchanged

By Luke Heighton
     FRANKFURT (MNI) - The European Central Bank kept key rates on hold
Thursday, but pointed to some decrease in downside risks as President Christine
Lagarde launched a strategic review of monetary policy strategy.
     While risks surrounding the euro area growth outlook, related to
geopolitical factors, rising protectionism and vulnerabilities in emerging
markets, remain tilted to the downside, these "have become less pronounced as
some of the uncertainty surrounding international trade is receding," the
Governing Council said after its meeting, pointing also to the ongoing weakness
of global trade and European manufacturing.
     Inflation developments remain subdued, it said, but there are signs of a
moderate increase in underlying inflation in line with expectations.
     Lagarde repeated previous calls for greater support from fiscal
authorities, and for the implementation of structural reforms across the euro
zone. "Two of the countries that have fiscal space are now seriously looking at
how to expand more fiscally with their respective budgets," she added. "So there
is progress."
     The ECB president said that the tiered deposit rate introduced in September
"has proven to be effective," and defended the use of negative interest rates.
     Although the conclusion of a phase one trade agreement between the U.S. and
China "has slightly reduced uncertainty," Lagarde said, " its impact on net
basis for the euro area needs to be assessed."
     The review of monetary policy strategy will focus on the definition of
price stability, the monetary policy toolkit, economic and monetary analysis and
     It will consider the quantitative formulation of price stability, "together
with the approaches and instruments by which price stability is achieved." The
review will also take into account how financial stability, employment and
environmental sustainability can be relevant in pursuing the ECB's mandate.
     Lagarde said she was prepared to listen to the "expectations of the people
to better understand their concerns," and stressed the "very prominent part"
that the environment and sustainability would play in it.
     "On climate change, I know that we will have a debate on whether it should
be the role of central banks. I'm also aware of the danger of doing nothing.
Failing to try is already failing."
     Asked whether the ECB might adjust its inflation measures to take better
account of housing costs, Lagarde replied: "How we measure inflation is clearly
something we need to look at. Are we going to resolve the issues? I doubt it."
--MNI Frankfurt Bureau; +49-69-720-146; email:
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$X$$$,MT$$$$,M$$EC$]

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