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ECB Keeps Rates, Forward Guidance Unchanged

ecbank sep12 12dec19 lt

The European Central Bank left its key interest rates, asset purchases and forward guidance unchanged on Thursday, in the first policy session chaired by the new chief Christine Lagarde.

The Governing Council decided to hold the refi rate unchanged at a record low 0 percent, the deposit rate at -0.50 percent and the marginal lending rate at 0.25 percent. The move was in line with economists' expectations.

The previous change was a 10 basis points cut in the deposit rate in September.

The bank also retained its forward guidance on both interest rates and asset purchases.

"The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 percent within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics," the bank said.

A fresh round of asset purchases began on November 1 at a monthly pace of GBP 20 billion. The central bank retained its guidance on the stimulus measure, saying it "expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates."

Lagarde is set to make her first post-decision press conference at 8.30 am ET.

Markets will be closely watching how the former IMF managing director communicates the ECB's message on the euro area economy amid sluggish growth and low inflation.

Lagarde, a former French finance minister, came to the helm at the ECB after Mario Draghi's term ended on October 31.

She has already announced that a strategic review of the ECB policy will start soon.

"We don't expect Lagarde to structurally change the introductory statement but will be looking for any changes in style and language in the Q&A session," ING economist Carsten Brzeski said last week.

Lagarde is likely to face a volley of questions on the planned strategic review, and whether the split in the Governing Council over the recent stimulus measures has healed or not.

The strategic review is likely to be a long, drawn-out affair with a wide remit, Captial Economics economist Andrew Kenningham said ahead of the latest policy session.

The ECB currently targets inflation "below, but close to 2 percent".

"In practice, any change to the target is likely to be controversial, take a long time to agree and ultimately be pretty small," the economist said.

While Thursday's meeting will be the first chance for the Governing Council officially to discuss the review, President Lagarde may want to wait for the new Council members, Isabel Schnabel and Fabio Panetta, to take up their posts in January before finalizing its scope, Kenningham added.

Eurozone interest rates were raised last in July 2011 by 25 basis points.

Lagarde will also unveil the latest set of ECB staff macroeconomic projections for Eurozone.

"The latest round of staff projections will very likely confirm the September projections," Brzeski said.

"The first official ECB forecasts for 2022 are of more relevance," the economist added.

In September, the ECB staff cut the euro area inflation forecast for this year to 1.2 percent and the outlook for next year to 1 percent. The projection for 2021 was trimmed to 1.5 percent.

Eurozone growth forecast for this year was cut to 1.1 percent and the projection for next year was lowered to 1.2 percent. The 2021 growth outlook was retained at 1.4 percent.

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