Dec 12, 2019

Central Banks: ECB holds rates steady at Lagarde's debut policy meeting

Elliot Smith

The European Central Bank (ECB) kept its rates unchanged on Thursday following new President Christine Lagarde’s first monetary policy meeting in Frankfurt.
The Governing Council voted to keep the main deposit rate at the historic low of -0.5%, in line with market expectations, while the marginal lending facility remained at 0.25%.
The ECB’s statement reiterated that rates will stay at the current level or lower until the central bank has seen the inflation outlook “robustly converge” to a level close to but below 0.2% and that underlying inflation has remained consistently convergent with that level.
It also confirmed that net asset purchases had started in November at a monthly rate of 20 billion euros ($22.3 billion) and that this will continue to run “as long as necessary” to reinforce the accommodative policy stance.
The euro traded roughly flat against the dollar at $1.1132 following the announcement awhile equity markets turned slightly negative after marginal early gains.
The ECB forecast annual real GDP growth for the euro area at 1.2% in 2019, 1.1% in 2020 and 1.4% in 2021 and 2022, an upward revision of 0.1% for 2019 and a downward shift of 0.1% for 2020 compared with September’s projections.
Lagarde suggested that the growth slowdown was stabilizing but that incoming data since October’s policy meeting “pointed to continued muted inflation pressures and weak euro area growth dynamics.”
“The risks to the euro area growth outlook relating to geopolitical factors, rising protectionism and vulnerabilities in emerging markets remain tilted to the downside, but have become somewhat less pronounced,” she added.
Inflation was revised up by 0.1% for 2020 but down by 0.1% to 1.4% for 2021, with 2022 forecast at 1.6%.
“In our 2022 forecast for inflation, while the entire year is forecast at 1.6%, the fourth quarter is at 1.7%, so directionally it is slightly increasing across the course of 2022,” Lagarde said in her first press conference at the ECB’s helm.
“Is it satisfactory? It is certainly directionally good, but is it the aim that we pursue? No,” she added.
The former head of the International Monetary Fund (IMF) and former French finance minister inherited an inflation rate of 1.0% against the ECB target of “below but close to 2%” upon taking the reins in November.
In September, Lagarde’s predecessor Mario Draghi launched a massive stimulus package which entailed a cut to the central bank’s main deposit rate a second round of quantitative easing in a bid to stimulate the sluggish euro zone economy.
The move proved controversial among the Council, but Lagarde offered support to the bond-buying program and record low rates back in September, highlighting that the challenges warranting a highly accommodative policy stance had not diminished.
While Lagarde was not expected to break from the trajectory set in motion by Draghi so early in her tenure, investors will be closely monitoring the semantics in her impending press conference for any hints on future policy direction.
One of her first moves was to announce a wide-ranging policy review, the first since 2003, with the euro zone central bank’s current stance under fire from market participants.
At Thursday’s press conference, Lagarde said the review would get underway in January with a view to completion by the end of 2020, and would reach out “not just to the usual suspects” but also Members of European Parliament (MEPs), the academic community and “civil society representatives.”

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