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ECB holds rates as Christine Lagarde launches strategic review

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Via Financial Times

The European Central Bank has kept its ultra-loose policy rates on hold and signalled that it expects them to stay there for many months as it undertakes its first strategic review for 16 years.

The central bank said it would outline the framework for the review of its monetary policy objectives and tools later on Thursday.

The review, only the second in the central bank’s 20-year history, is set to trigger bruising debates on some of the most divisive issues in central banking, from the side-effects of negative rates to the financial risks of climate change.

Christine Lagarde, who took over from Mario Draghi as ECB president in November, said it would be a “broad exercise” and that the bank “cannot operate as we did back in 2003”.

“It will be a whole host of things,” Ms Lagarde told a press conference on Thursday. “It will have to do with how we deliver, how we measure what tools we have and how we communicate.

“My commitment was to be able to listen to the expectations of the people.”

The ECB president said it had already shifted about €1bn of assets in its own pension fund into green assets. She added that its review would look at “how much the bank can do or should do” in a similar direction on the €200bn of corporate bonds it has bought via its €2.6tn quantitative easing programme and assess “whether it collided with our mandate”.

The process starts at a time when central banks are grappling with doubts about whether their main tools have lost their effectiveness, as inflation remains stuck below their targets despite years of accommodative policy measures.

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Ms Lagarde has been given some breathing space for the review after the eurozone economy showed signs of stabilising recently, albeit at a low level, as risks of a full-blown trade war or a deeply disruptive Brexit recede.

In a press conference on Thursday Ms Lagarde said risks to the bank’s growth outlook remained “tilted to the downside”.

But she also said risks had become “somewhat less pronounced” as trade tensions have eased in recent weeks, after a partial deal over tariffs between China and the US.

Ms Lagarde said the “phase one” agreement between Beijing and Washington was a “critical development” that would have consequences around the globe, with trade potentially shifting in response to the deal. “It is something that our teams are looking at very carefully to examine what the impact [will be] on a net basis for the euro area,” she said.

Ms Lagarde said climate change would be “an important matter” for the review to examine. While acknowledging that some policymakers fear “mandate creep” by central banks on environmental issues, she said the ECB could not rely on others to tackle the issue, adding: “Failing to act is already failing.”

The brightening prospects for the eurozone, despite the fact that growth is expected to have slowed from 1.8 per cent in 2018 to 1.2 per cent in 2019, have prompted investors to shift from anticipating a rate cut this year to positioning themselves for rates to rise next year.

One cloud over the ECB’s rate-setting meeting came from the German constitutional court, which is considering whether the central bank’s €2.6tn bond-buying programme is legal. The court announced on Thursday that it would give its ruling in the case on March 24.

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The case stems from a complaint by a group of almost 2,000 people, led by German economists and law professors, who argue that the ECB’s so-called quantitative easing programme is illegal.

The German critics say QE breaches eurozone treaties that prevent the central bank from financing member states’ governments by buying their debt. While this was rejected by the European Court of Justice in December 2018, its ruling came back to the German court to interpret it under national law.

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