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ECB Starts Yearlong Review With Few Hints on Changes to Come

Paul Gordon and Carolynn Look
ECB Starts Yearlong Review With Few Hints on Changes to Come

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The European Central Bank launched the first rethink of its policies since 2003, giving itself wide scope over the aspects of the assessment but leaving investors largely in the dark on the details.

“We are going to review a whole host of issues,” President Christine Lagarde told reporters after the Governing Council meeting on Thursday in Frankfurt. The exercise will encompass “how we deliver, how we measure, what tools we have and how we communicate.”

The ECB is seeking to explain why years of monetary stimulus, including measures such as negative interest rates and bond purchases that have sparked political criticism and lawsuits in some parts of the euro zone, has still left inflation short of the goal of “below, but close to, 2%.”

The assessment, due to be complete by the end of the year, will study that goal as well as the policy toolkit, economic and monetary analyses, and communication. It will also tackle “other considerations” such as financial stability, employment and environmental sustainability, according to a statement after the press conference.

The announcement, however, didn’t include more information than what had already been revealed by Lagarde and other policy makers before the meeting. “ECB...Wake me up before you review,” Carsten Brzeski, chief economist at ING Germany, wrote in an email.

“The details were disappointingly thin on the ground during the press conference and not much better from the press release that followed,” according to Andrew Mulliner, portfolio manager at Janus Henderson Investors.

Governing Council members deliberately refrained from releasing specifics to avoid steering the debate in any particular direction, according to two people with knowledge of the matter who spoke on condition of anonymity. An ECB spokesman declined to comment.

Lagarde said the process will involve listening to the views of ordinary people, though the multilingual nature of the 19-nation euro zone would require a different approach from the U.S. Federal Reserve’s “Fed Listens” events of last year.

Policy makers have the advantage of a slightly brighter economic backdrop that gives them some space for the rethink. Trade tensions have eased with the signing of a preliminary U.S.-China trade deal, though President Donald Trump warned this week that threat of car tariffs still looms over the European Union, and confidence among businesses and investors has picked up.

What Bloomberg’s Economists Say...

“As expected, the main focus of the European Central Bank’s long-awaited strategic review will be on its price stability objective... We expect policy to remain as it stands until the end of next year, which should give the central bank ample room to focus on longer-term questions.”

-Maeva Cousin. Read her ECB REACT

Lagarde noted signs of a “moderate increase in underlying inflation” -- a remark that briefly pushed the euro to a session high -- and said downside risks to the ECB’s economic outlook are “somewhat less pronounced.”

But with inflation struggling to stay much above 1%, she said monetary policy must remain “highly accommodative,” and reiterated that governments with the space to increase spending should be prepared to do so.

Issues such as globalization, digitalization and demographics are challenging the long-standing theory that inflation will pick up if you throw enough money at it. Negative interest rates and 2.6 trillion euros ($2.9 trillion) of asset purchases so far resulted in consumer-price growth barely above 1%.

Other economies haven’t fared much better. Japanese inflation has been muted for a generation despite extremely accommodative policy. In the U.S., where fiscal policy has helped a little, the Fed is also appraising its strategy. Those results are expected to be released this year.

In her remarks, Lagarde again defended the decision to focus on climate change risks to the economy against critics who say it will distract policy makers from their primary mandates.

The need to join the fight has been a frequent refrain of Lagarde, echoing Bank of England Governor Mark Carney’s argument that central banks and investors must pay attention as the shift to greener regulations and policies threatens to cut the value of carbon-intensive assets.

“It’s difficult to disagree that climate change is a threat to financial stability,” she said. “It is going to be an important matter that will be debated during the strategy review. The impact, the consequences we draw, the impact on the way we operate, all those questions will have to be debated.”

At the ECB’s meeting, the 500th since the central bank was founded two decades ago, the Governing Council also decided to keep the deposit rate unchanged at -0.5% and the pace of monthly bond buying at 20 billion euros ($22 billion), in line with economists’ expectations.

Policy makers reiterated their pledge that borrowing costs will remain at present or lower levels until the inflation outlook has “robustly” converged with their goal. Quantitative easing will run for as long as necessary.

While that guidance will now be part of the review, Lagarde wouldn’t be drawn on what any policy change might come.

“I would not exclude, preclude or anticipate how we’re going to deliver,” she said. “I do have my views as do other members. My mission is to harness all the views around.”

(Updates with why ECB officials didn’t release more specifics in seventh paragraph.)

--With assistance from Lucy Meakin, David Goodman, Zoe Schneeweiss, Brian Swint, Jana Randow, Jeannette Neumann, Fergal O'Brien, Catherine Bosley and William Horobin.

To contact the reporters on this story: Paul Gordon in Frankfurt at pgordon6@bloomberg.net;Carolynn Look in Frankfurt at clook4@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Alaa Shahine, Andrew Atkinson

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