European Central Bank President Christine Lagarde warned investors not to assume that current monetary policy is locked in for the foreseeable future just because officials are focused on reviewing their strategy.
“To those who think it’s on autopilot, that’s ridiculous,” she said in a Bloomberg Television interview at the World Economic Forum in Davos, Switzerland. “Let’s look at the facts. Let’s look at how the economy evolves.”
Lagarde spoke a day after announcing the first reappraisal of the ECB’s inflation goal and tools since 2003, in a process that won’t conclude until around December. With the euro-area economy stabilising and a stimulus package already in place, few analysts see much chance of a change in policy any time soon.
Economists predict the quantitative-easing programme, which was resumed by former President Mario Draghi just before he handed over to Lagarde in November, will run until the end of next year, with interest rates on hold until early 2022. Markets aren’t pricing a change in rates until at least mid 2021.
Still, the economic threats haven’t entirely subsided. Data published yesterday showed private-sector activity remained muted at the beginning of 2020, despite signs of a pickup in Germany. In its policy meeting, the ECB continued to describe the risks to its outlook as tilted to the downside, if less pronounced. US President Donald Trump used his appearance in Davos to revive the prospect of tariffs on Europe’s car industry.
“The ECB is still far from bringing inflation to its target and we believe it will act in the next few months,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “I don’t think a central bank like that can close the shop for a year.”
Lagarde said the rethink will be separate from the monetary-policy decisions that the Governing Council takes every six weeks.
Policy “will be conducted irrespective of the strategy review,” she said. “So to those who say it’s going to be completely static and stable for 12 months, I say ‘ah, watch out,’ because things change and we might have different signals and we might reconsider. We might. I don’t know at this point in time.”
Details on precisely what policy makers will study in their review were scant on Thursday, beyond general observations that it will be wide-ranging and focus on topics such as financial stability and climate change. The key question for the ECB is why it has fallen short of its inflation goal of “below, but close to 2%” for years.
Lagarde has her own views on what needs to be done but says she doesn’t want to disclose them for fear of influencing the debate before others have had their say. The intention is to reach out to academics and the wider public via national central banks.
“I know some people are disappointed that we didn’t say much more,” Lagarde said. “But a strategy review starts here and finishes there, and you cannot say here what you’re going to do there — otherwise you don’t do a strategy review.”
Lagarde’s Task List include assessing how policy strategy has supported ECB mandate over the years and if anything should be adjusted; quantitative formulation of price stability and how it is achieved
“Other considerations” such as how financial stability, employment and climate policies can be relevant; and effectiveness of toolkit and its side effects.
Analyses through which ECB assesses price stability risks
Bank of France Governor Francois Villeroy de Galhau told Bloomberg Television in Davos that he believes the inflation goal must be “symmetric, flexible and credible” — reflecting the debate over whether to set a precise 2% goal with a range of tolerance either side.
His Dutch counterpart Klaas Knot said in a panel discussion alongside Villeroy that the ECB must be “honest and open” about its failure to hit its target, and “at a minimum, I would say that it needs to be clarified.”
For some ECB watchers, officials have effectively hinted that there is little urgency to share their thinking, and that they’re in no hurry to getting back to tweaking their current monetary stance either.
“I get the sense that until the review is complete, or at least until you have some idea of what’s going to come out of it, it doesn’t make sense to be very activist,” said Peter Dixon, an economist at Commerzbank AG.
The ECB also has less ammunition than it used to, giving it cause for caution before attempting more easing. Resorting to more QE, for example, might mean confronting self-imposed limits on the volume of purchases that could reopen wounds from a bitter showdown among policy makers last year. The programme is particularly disliked by the Bundesbank, and indeed faces a ruling on its legality in Germany’s top court in March.
The central bank isn’t alone in benefiting from what is, for now, a relatively benign economic outlook. Economists including those at Goldman Sachs Group Inc predict most major central banks, including the Federal Reserve, which meets next week, is likely to keep its monetary policy on hold for the rest of the year.
Lagarde was scheduled to discuss the global growth outlook at Davos later on Friday with a panel of luminaries including her Bank of Japan counterpart Haruhiko Kuroda, as well as US Treasury Secretary Steven Mnuchin, and Kristalina Georgieva, her successor as head of the International Monetary Fund.
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