Last week marked European Central Bank president Christine Lagarde’s first policy meeting at the ECB. As broadly expected, Governing Council kept the key ECB interest rates unchanged. More importantly however, Lagarde communicated increased confidence in growth outlook, signalled continuity in monetary policy, and shed light on the upcoming ECB strategy review.
On the back of muted inflation pressures and weak economic growth, the ECB Governing Council reiterated its current monetary policy stance and left interest rates unchanged. On a positive note, Lagarde highlighted increased confidence in the growth outlook following some “initial signs of stabilisation in the growth slowdown” with less pronounced downside risks. The ECB president mainly referred to progress in the US-China trade war talks and the possibility of less uncertainty following the UK elections.
Nonetheless, the ECB reduced the projected annual real GDP growth rates for 2020 and communicated muted inflation growth expectations that fall short of the two per cent inflation target. Lagarde pinned the blame on the current weak economic growth environment which is delaying wage cost pressures on inflation and referred to slack in the labour market. The latter refers to the shortfall between the amount of work desired and that available, and the relative easiness to employ more workers.
The signal of monetary policy continuity was another key takeaway from the ECB meeting. Lagarde highlighted how past policy decisions have been re-endorsed and are viewed as a whole package rather than individual components. While stressing the need to measure and monitor side-effects of keeping interest rates below zero, the ECB president communicated a generally favourable assessment, stating that negative rates have allowed the ECB to lower financing cost and increase the volume of financing.
As continuously stressed by her predecessor, Lagarde also emphasised the need for governments with fiscal space to pursue fiscal policies that would help drive economic growth in the euro area.
Only one month in her ECB presidency, Lagarde also took the opportunity to comment on the upcoming strategic review of the ECB’s monetary policy strategy. The strategic review, which is expected to start in January 2020 and conclude towards the end of the same year, is the first review since 2003. While the ECB’s mandate of price stability will remain unchanged, the ECB intends to leave no stone unturned while assessing the effectiveness and efficiency of past monetary policy decisions to deliver that mandate.
The strategic review is expected to be broad, ranging from tackling the assessment of side effects of unconventional negative interest rates to the challenge of climate change, inequality and technological changes over the past 16 years. Needless to say, the quantitative definition of price stability target is expected to take centre-stage.
Lagarde’s leadership style, which she stated to be neither a hawk, nor a dove, but an owl, metaphorically infers that she is aiming at listening to advice and remaining as open and consensual as possible. This might lead the strategic review, which is expected to trigger a series of discussions on some of the most divisive issues, to take longer than a year to conclude.
Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.