Lagarde Marks ECB Policy Debut With Optimistic Note for Economy
Christine Lagarde, president of the European Central Bank in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

Lagarde Marks ECB Policy Debut With Optimistic Note for Economy

(Bloomberg) --

Christine Lagarde said the euro zone’s economic slowdown is showing signs of bottoming out, in comments after her first policy meeting as president of the European Central Bank that suggested further interest-rate cuts are unlikely any time soon.

“There are some initial signs of stabilization in the growth slowdown and of a mild increase in underlying inflation,” she told reporters on Thursday. “The risks surrounding the euro-area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside, but have become somewhat less pronounced.”

The euro jumped as high as $1.1154 before paring gains to trade up 0.1% at $1.1141 at 3:21 p.m. Frankfurt time.

Still, the president unveiled updated economic forecasts that showed a muted outlook for now. Growth will be 1.1% next year -- a slight revision lower -- and 1.4% in 2021, the bank predicted. The first outlook for 2022 showed an expansion of 1.4%. Inflation that year is seen at 1.6% -- still below the goal of just under 2%.

The Governing Council earlier held its deposit rate at a record-low minus 0.5%, and bond purchases at 20 billion euros ($22 billion) a month, sticking to a controversial package unveiled in September.

Yet pressed on whether it’ll need to take further action, Lagarde said that “we are very aware of the side effects” of negative rates, and called on governments to help out with fiscal stimulus and structural reforms. “It would be very welcome to have other policies join the monetary policy in order to support the reduction of slack.”

Strategic Review

She also reiterated her pledge to undertake the central bank’s first strategic review since 2003, saying it is “overdue” and should be started in January, to be completed before the end of the year.

While a key part of the assessment will be whether the inflation goal needs to be adjusted, it will be “comprehensive,” Lagarde said. It’ll include consultation with members of the European Parliament, the academic community and representatives of civil society, with no “preconceived landing zone.”

It will address challenges including climate change, technology, and rising inequality, and Lagarde expressed disappointment that the European Union was unable to agree this week on a set of standards for defining green investments. That would have been “extremely helpful” for the ECB to contribute to combating global warming, she said -- issuing a “call to find an agreement.”

Her ambitious plans have worried some ECB officials though, who fear being diverted from their primary mandate of restoring price stability. Inflation has averaged just 1.2% so far in 2019, despite years of unprecedented and often contentious stimulus.

While some economic indicators have suggested lately that the bloc’s slowdown might be easing, Germany remains embroiled in its worst manufacturing slump in a decade, and the U.S.-China trade war and Brexit have continued to weigh on growth. Lagarde said the latest signs are that U.S.-China talks are “heading in a better direction.”

The key message was that while price stability is the core mandate, Lagarde -- who formerly ran the International Monetary Fund and is the first ECB leader never to have worked at a central bank -- wants to do much more. The review will “explore each and every corner” of the institution’s operations to “better respond to serving euro-area citizens” as well as delivering on the price-stability mandate.

©2019 Bloomberg L.P.

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