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ECB Announces Monetary Policy Strategy Review

ecbank sep12 23jan20 lt

The European Central Bank on Thursday announced the launch of a review of its monetary policy strategy, the first such exercise since 2003, as it left its interest rates, asset purchases and forward guidance unchanged.

The central bank is set to provide the details about the scope and timetable of the review in a separate press release at 15:30 CET.

The latest strategy review is expected to conclude by the end of this year.

Regarding its outcome, ECB President Christine Lagarde said in December that there was "no preconceived landing zone at this point".

She will hold her post-decision press conference at 8.30 am ET.

The strategic review is very significant at a time when questions are raised about the effectiveness of the ECB targeting inflation of "below, but close to 2 percent" to set its monetary policy.

The progress of the review is likely to be closely-watched, mainly for hints on any change to the inflation goal.

"In our view, the most important part of the review will be an assessment of the definition of price stability and how to reach it," ING economist Carsten Brzeski said earlier this week.

"We still think that eventually, a new definition (of "around 2 percent") would institutionalize symmetry while at the same time provide maximum flexibility; more than any point range would offer."

The main refi rate is at a record low zero percent, and the deposit rate is at -0.50 percent after it was cut by 10 basis points in September 2019. The marginal lending facility rate is at 0.25 percent.

Retaining its forward guidance, the bank said interest rates is set 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 central bank had started a fresh round of asset purchase at a monthly pace of EUR 20 billion on November 1.

The ECB retained its guidance on the stimulus measure, reiterating that 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."

Policymakers likely continued the debate on the effectiveness of the stimulus measures that Lagarde's predecessor Mario Draghi announced in September that attracted lot of criticism from some rate-setters.

They likely stuck to their "wait-and-watch" stance and make any changes only in March.

On the economic data front, nothing outstanding or alarming came out from the Eurozone since the December policy session.

As this year is likely to be dominated by the strategic review, markets are now expecting any change to interest rates, mostly likely a cut, only in 2021.

Meanwhile, Capital Economics has forecast a cut in the deposit rate to -0.7 percent in September and expects an increase in the monthly asset purchases to EUR 30 billion before year-end, with the additional purchases being corporate bonds.

"Economic growth is likely to be sluggish throughout this year, keeping core inflation low and ultimately prompting the ECB to further loosen policy," Capital Economics said in a report this week.

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

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