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ECB Hopes Economic Calm Buys Reflection Time: Decision Day Guide

Published 23/01/2020, 05:00
Updated 23/01/2020, 08:19
© Reuters.  ECB Hopes Economic Calm Buys Reflection Time: Decision Day Guide

© Reuters. ECB Hopes Economic Calm Buys Reflection Time: Decision Day Guide

(Bloomberg) -- European Central Bank President Christine Lagarde can consider herself fortunate -- the euro-area economy has brightened just in time to allow her to focus on a strategic review that could last the rest of the year.

The Governing Council’s policy decision on Thursday will be dominated by the announcement of the first appraisal of its inflation goal since 2003, plus a deep dive into new challenges such as climate change and digital currencies. That’s partly because economic concerns have faded with U.S.-China trade tensions easing, Brexit back on track, and monetary support locked in.

It’s unclear how long the respite will last -- U.S.President Donald Trump used his appearance at the World Economic Forum in Davos to again threaten tariffs on the European Union, and the EU’s looming trade talks with the U.K. hold room for surprises. But for now, as Executive Board member Yves Mersch said last week, the ECB is at least able to point to “good signs of stabilization.”

Economists expect the deposit rate to stay at minus 0.5% and quantitative easing to remain at 20 billion euros ($22 billion) a month when the decision is announced at 1:45 p.m. in Frankfurt. Lagarde’s briefing begins 45 minutes later.

Economic Outlook

Despite a manufacturing slump, euro-area unemployment is holding close to a record low and the services sector grew at the fastest pace in four months in December. Economic confidence improved and inflation accelerated to the fastest pace in six months, albeit mainly because of energy prices.

In Germany, the bloc’s largest economy and a particularly weak spot for factories, investor confidence is at the highest in more than four years and stocks are near a record high.

The ECB predicts euro-zone GDP growth will slow slightly to 1.1% this year from 1.2% in 2019 then pick up in 2021. It first described the risks to its outlook as being “to the downside” a year ago, and one question is whether it’s ready to drop that language just yet.

What Bloomberg’s Economists Say...

“The economy is broadly evolving as the ECB has been expecting, so we don’t expect any shift in policy at the January meeting.”

----David Powell and Maeva Cousin. Read the ECB Preview

Inflation Goal

Moves toward reviewing how the ECB conducts policy started more than a year ago, when Finnish Governor Olli Rehn called for a deeper analysis of ideas being floated by academics and policy makers. Lagarde endorsed such a step even before she took over the presidency from Mario Draghi in November.

She wants to announce it after this meeting, and conclude it before the end of the year. It’ll probably be in two parts, according to people familiar with the matter. One will focus on the inflation goal, measures of price growth, and policy instruments; another will tackle issues including financial stability, climate change and communication.

Economists consider the most likely outcome to be a change to the target of price growth “below, but close to, 2%” that’s been in place since the last review 17 years ago, and which the ECB has struggled to hit for years.

Climate Challenge

The response to climate change will be harder to agree, with some policy makers concerned that the central bank’s focus on price stability could be diluted. Lagarde is likely to be peppered with questions at her press conference on the likelihood of the ECB buying so-called green bonds under QE or pushing credit-rating agencies to pay greater attention to the risks of financing carbon-intensive assets.

Digital Currencies

Another topic may be the ECB’s decision this week to team up with major central banks including the Bank of England and Bank of Japan to assess the potential for developing their own digital currencies.

Policy makers in Frankfurt have discussed the idea already, and Lagarde has been receptive, seeing it as a way to fight financial exclusion. She’ll need to tread carefully though -- Bundesbank President Jens Weidmann has urged caution.

Davos Trip

As soon as she’s done with the ECB press conference, Lagarde will head off to Davos. There she’ll discuss the global growth outlook with a panel of luminaries including U.S. Treasury Secretary Steven Mnuchin, BOJ Governor Haruhiko Kuroda, and Kristalina Georgieva, her successor as head of the International Monetary Fund.

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