MNI REVIEW: ECB To Start Strategy Review After Lagarde Debut

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank will begin a year-long

strategic review in January, examining the effectiveness of existing policy

tools and considering how to address challenges such as climate change, ECB

President Christine Lagarde said on Thursday at her first monetary policy

meeting, which left rates unchanged.

     Describing herself as neither a hawk, nor a dove, but rather an "owl with

wisdom," the former French finance minister and IMF chief stressed the symmetry

of the ECB's inflation objective and characterised the eurozone inflation

outlook as "subdued," with "weak" growth dynamics. There were, however, "initial

signs" of stabilisation in the growth slowdown and of a mild increase in

underlying inflation in line with previous expectations amid ongoing employment

growth and increasing wages.

     While risks surrounding the euro area growth outlook, related to

geopolitical factors, rising protectionism and vulnerabilities in emerging

markets, "remain tilted to the downside," Lagarde added, these have become

"somewhat less pronounced."

     Eurosystem staff revised their 2020 eurozone growth forecast down by 0.1

percentage point for 2020 compared with September's projections, while the

outlook for HICP inflation was revised up 0.1 percentage point for 2020 and down

0.1 percentage point for 2021, driven principally by the expected future path of

energy prices.

     Staff saw GDP increasing by 1.2% in 2019, 1.1% in 2020 and 1.4% in both

2021 and 2022. HICP inflation was expected to come in at 1.2% in 2019, 1.1% in

2020, 1.4% in 2021 and 1.6% in 2022.

     --NO SECOND-GUESSING

     Lagarde opened her first press conference as ECB president by reminding

journalists, ""I will have my own style. Don't overinterpret. Don't

second-guess. Don't cross-reference," before asserting not only that recent

policy decisions made under her predecessor Mario Draghi had been "re-endorsed."

     Asked whether an inflation rate of 1.7% at the end of 2022 should be

considered close enough to target, she replied that it was "directionally good"

but "not the aim." She said that the comparatively low take-up of cheap loans to

banks via a second auction of the third round of the ECB's targeted longer-term

repurchasing operations should not be given too much weight.

     The ECB announced that banks took up E97.7billion in the second TLTRO III

auction, a result characterised by Nordea as "quite a negative surprise", with a

draining effect on excess liquidity.

     Lagarde's introductory statement reprised a number of lines familiar from

Draghi's time as president. These included references to the need for greater

fiscal support where possible, structural rebalancing where necessary, and

improving the functioning of the Economic and Monetary Union. The Governing

Council also "continues to stand ready to adjust all of its instruments, as

appropriate, to ensure that inflation moves towards its aim in a sustained

manner, in line with its commitment to symmetry," she said.

     The strategic review in January should be complete by the end of 2020. It

will, she added, look at the "effectiveness and appropriateness" of all monetary

policy tools, while addressing technological change, "aspects of inequality that

are certainly rising," and the "immense challenge of climate change." Lagarde

praised the "ambition" of the European Green Deal announced in Brussels on

Monday.

     The new president said the Governing Council was "very much aware of the

side effects" of monetary policy. It would, she said, "continue to monitor the

side effects and we might further develop that work."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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