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ECB Strategy Review To Take Center Stage

ecbank sep12 22jan20 lt

A much-talked about review of the European Central Bank's strategy is set to garner the limelight in the latest rate-setting meeting on Thursday that is expected to give little in terms of changes in the monetary policy stance or forward guidance.

ECB President Christine Lagarde will likely announce the official start of the strategy review in her second policy meeting. Such a process was undertaken last in 2003. The latest review is expected to conclude by the end of this year.

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

The strategic review is very significant as it comes 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 set 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.

"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."

No change is forecast for ECB interest rates, asset purchases and forward guidance in Thursday's Governing Council meeting.

Policymakers is expected to continue the debate 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 are likely to stick to their "wait-and-watch" stance and make any changes only in March.

On the economic data front, nothing either 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 Eurozone 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 the 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," the research group said in a report this week.

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

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.

The policy decision announcement is due at 7.45 am ET and Lagarde is set to hold her customary post-decision press conference at 8.30 am ET, on Thursday.

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