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ECB to launch review that will redefine its mission and tools

European Central Bank President Christine Lagarde is set to launch a broad review of the bank’s policy today that is likely to see her redefine the ECB’s main goal and how to achieve it. 

The ECB has fallen short of its inflation target of just under 2% for years despite increasingly aggressive stimulus measures under her predecessor, Mario Draghi. 

ECB rate-setters are not expected to make any policy change this week but simply stand by their pledge to keep buying bonds and, if needed, cut interest rates until price growth in the euro zone heads back to their goal. 

Ms Lagarde will, however, announce the start and scope of the ECB’s first strategic review since 2003.

The review will last for most of the year and will span topics from the inflation target to digital money and the fight against climate change.

Investors will be looking for clues to whether the review will see Lagarde cement her predecessor’s legacy of monetary largesse, or if she will use it to acknowledge worries that years of easy credit have fuelled financial bubbles. 

Changing the ECB’s formulation of price stability – currently defined as an annual inflation rate below, but close to, 2% over the medium term – will be the focal point of the review. 

The ECB could signal its commitment to boosting inflation by raising the goal to 2% and spelling out that it will take any undershooting just as seriously as an overshoot. 

“Our inflation target must be symmetric. If the central target is seen as a ceiling, we have less a chance of meeting it,” ECB policymaker Francois Villeroy de Galhau said recently. 

But policy hawks on the Governing Council, who have long called for the ECB’s money taps to be shut off, will not go down without a fight. 

Some of them favour creating a tolerance band around 2%, which would lower pressure on the ECB to act, while others would leave the target unchanged or even cut it. 

Rate-setters will also debate the pros and cons of their tools, such as sub-zero rates and massive bond purchases, which have been credited with staving off the threat of deflation but at the cost of an unprecedented rise in house and bond prices. 

The ECB regularly lauds those instruments, recently estimating that without them, the euro zone economy would have been 2.7 percentage points smaller at the end of 2018. 

But minutes of the December meeting show growing discomfort about their side effects. 

That led to calls by some policymakers to give housing costs greater weight in inflation calculations and take into account households’ perceptions of price growth, which is generally higher than official figures. 

While these matters are addressed, the ECB is expected to leave its monetary policy on hold. 

That would leave it buying €20 billion worth of bonds every month and charging banks 0.5% on their idle cash for most of the year. 

“While the ECB reviews its strategy, we see no change in policy settings,” economists at Morgan Stanley wrote in a note. 

Euro zone data has improved recently, leading economists to believe the export-focused economy has weathered the storms of the global trade war. 

Furthermore, a trade deal between the US and China, and the prospect of an orderly Brexit are lessening the two main risks the ECB had said were clouding the horizon. 

But the outlook for euro zone growth and inflation remains lukewarm, meaning the ECB is likely to strike a cautious tone by reaffirming its warning about “downside risks” to the economy.

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ECB has not reached limits of monetary policy – Lane

The European Central Bank has not reached the limit of what it can do on monetary policy, its chief economist Philip Lane has said.

Despite unprecedented monetary easing, Professor Lane said the ECB still had further tools in its toolbox if needed, but added that they would depend on particular circumstances. 

“Let me emphasise that we don’t think we’re at a limit as of yet,” chief economist Philip Lane, the former Central Bank Governor, told a Fortune conference in Paris.

“We do think that the bigger focus should be rather on what other policies can contribute to make this limits question less relevant, less interesting because the economy would be growing more quickly,” he added.

ECB announces measures to kick start euro zone economy

ECB announces measures to kick start euro zone economy

The European Central Bank today promised an indefinite supply of fresh asset purchases and cut interest rates deeper into negative territory, an effort to prop up the ailing euro zone economy.

The moves come in the final weeks of ECB President Mario Draghi’s mandate.

They will increase pressure on the US Federal Reserve and Bank of Japan to ease next week to support a world economy increasingly characterised by low growth and protectionist threats to free trade.

Yet there were immediate doubts as to whether the ECB measures would be enough to boost a euro zone recovery in the face of a US-China trade war and possible disruption from Brexit.

The ECB cut its deposit rate – the rate it charges banks to hold money – by 10 basis points to a record low of -0.5% from -0.4%.

ECB deposit interest rate cut – a Draghi on savers

It also promised that rates would stay low for longer and said it would restart bond purchases at a rate of €20 billion a month from November 1.

“The Governing Council expects (bond purchases) to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates,” it said in a statement.

Given that markets do not expect rates to rise for nearly a decade, such a formulation suggests that purchases could go on for years – an eventuality Mario Draghi did not challenge.

“We have a relevant headroom to go on for quite a long time at this rhythm without the need to raise the discussion about limits,” he told a regular news conference after the meeting.

The news triggered a rally in euro zone bonds that would cut the cost of borrowing in the 19-country currency bloc, and pushed the euro below $1.10, prompting expectations that inflation could rise.

US President Donald Trump, who this week called on the US Federal Reserve to follow other central banks in adopting negative interest rates, accused the ECB of seeking a trade gain by deliberately depreciating the euro against the dollar.

“And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!” he tweeted.

The rate cut will however increase the cost to commercial banks of parking their more than €1 trillion worth of excess reserves at the central bank.

The ECB said it would compensate lenders for part of this charge to ensure they continued to lend to the real economy.

The ECB also eased the terms of its long-term loan facility to banks and said it would introduce a multi-tier deposit rate facility to help them.

Mario Draghi, whose pledge in 2012 that the ECB would do “whatever it takes” to save the euro is credited with helping restore stability at the peak of the bloc’s debt crisis, stressed the currency zone needed more support.

“Incoming information since the last Governing Council meeting indicates a more protracted weakness of the euro area economy, the persistence of prominent downside risks, and muted inflationary pressures,” he said.

Indeed the ECB’s initial, unprecedented €2.6 trillion bond purchase scheme since the financial crisis has had only limited success in stimulating activity.

Data earlier showed euro zone industrial production fell for a second month in July, while Germany’s Ifo institute predicted a recession in Europe’s economic powerhouse in the third quarter.

Although markets had priced in a revival of asset purchases, over half a dozen conservative policymakers spoke out in public against such a scheme, leaving markets in doubt about how bold the ECB’s measures would be.

The decision suggests that many of these sceptics eventually agreed, giving Draghi a comfortable enough majority in what is likely to be his last major policy move before handing over to Christine Lagarde later this year.

The ECB has undershot its inflation target of almost 2% since 2013 so stimulus was essential to maintain credibility.

But policy easing by central banks around the globe, including the US Federal Reserve, also put the ECB in a bind.

Not easing in sync with the Fed also risked pushing the euro higher, which would then dampen inflation and put the bank even further away from its targets.

Draghi’s critics argue that the euro zone’s biggest troubles – a global trade war, Brexit and China’s slowdown – are outside the ECB’s control, so any stimulus would have a limited impact.

They also say the bloc is experiencing a slowdown, not a recession, and that bond purchases, the ECB’s most powerful tool, should be reserved for real crises, especially since the bank has used up much of its firepower in past stimulus rounds.

With Lagarde taking over on November 1, some also argued that the ECB should refrain from making long-term commitments that would tie the hands of the bank’s next president.

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ECB President hopeful supports bank’s current stance

ECB President hopeful supports bank’s current stance

The nominee to be the next President of the European Central Bank, Christine Lagarde, has said she supports the current stance of the ECB.

The ECB maintains that “a highly accommodative policy stance is warranted for a prolonged period of time in order to bring inflation back to below or close to 2%.”

Ms Lagarde was speaking before the European Parliament’s Economic and Monetary Affairs Committee today.

Her appointment to the ECB must be approved by the Parliament and MEPs are due vote on whether to approve her nomination later this month.

Responding to a question on the impact of negative deposit rates on savers, Ms Lagarde said she wants people of the euro area to understand why decisions are being made.

She said with the “threats on the horizon” a more accommodative monetary policy is justified.

Ms Lagarde also said that during the financial crisis “everyone had to transgress the rules for the public good – we made sure there was no meltdown or bank run to protect depositors and savers.”

This all points to a continuation of the ECB’s low interest policies if – as is expected – Christine Lagarde’s nomination is approved.

The current ECB President, Mario Draghi, steps down at the end of October.

Christine Lagarde has been the Managing Director of the IMF since 2011. Before that, she was the Finance Minister of France.

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ECB readies big guns as September rate cut beckons

ECB readies big guns as September rate cut beckons
The European Central Bank (ECB) will deliver both rate cuts and will pump yet more money into the eurozone’s ailing economy next month.

The disclosures came in the minutes of the ECB’s July meeting, the final one to be headed by Mario Draghi, who is credited with rescuing the euro after his 2012 pledge to “do whatever it takes” to support the currency.

While the outgoing president of the ECB may have prevented the break-up of the eurozone, the bank’s zero-rate policies and €4.65trn of cash injections have failed to lift the economies of the 19-country bloc, and they are again facing a recession in the making.

That is in sharp contrast to the US, where strong growth has given the Federal Reserve more room to boost the economy, although it likely has less need to do so than the eurozone, where bond yields for many countries are mired in negative territory.

The performance of Germany, the industrial powerhouse of the EU, looks to be even worse than that of the UK, where the self-inflicted wounds of Brexit are slowing the economy.

After the German Purchasing Managers Index reading came in at 43.6 in August, expectations are that its economy will have contracted for two consecutive quarters by the end of September, while the UK will have bounced back from the output it lost in the second quarter of the year.

“Signs of stabilisation are few, and the question remains if the manufacturing sector recession will spill over to other parts of the economy, delaying a potential recovery later this year,” said Jeroen Blokland, a portfolio manager at Dutch asset manager Robeco.

With the ECB set to cut and possibly take its key rates below zero, that puts it at odds with the Fed. The US central bank indicated in its own minutes, issued on Wednesday, that its one interest cut had been for insurance purposes, and its rate setters were deeply divided on whether additional cuts were necessary.

The Fed could, at most, deliver another half a percentage point of cuts, based on its current projections, versus market pricing of cuts up to 1-1/4pc by the end of next year.

That raises the question once more as to whether the world economy can fully recover when the Federal Reserve and the ECB are pulling in different directions.

They did so in 2011 and from 2015 onwards, when the Fed embarked on a sustained series of interest rate rises.

The difference between the two central banks did not escape US president Donald Trump, who has criticised the Fed and says that ECB cuts are aimed at deliberately weakening the euro.

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Debt costs up for business despite ECB rate-cut talk

Debt costs up for business despite ECB rate-cut talk

Borrowing costs for small and mid-sized businesses in Ireland increased in the first three months of the year, despite the wider speculation in the economy that interest rates will fall.

Irish SMEs already pay some of the highest borrowing costs in Europe.

The latest Central Bank data on credit for small and medium enterprises (SMEs) indicates that firms remain extremely cautious about borrowing.

Despite Ireland having one of the fastest-growing economies in the EU, gross new lending to Irish-resident SMEs slowed to €1.1bn in the first quarter of 2019 from the previous quarter’s €1.5bn flow.

Debt repayments exceeded new lending to all Irish SMEs by €397m in the period.

Nervousness ahead of Brexit, originally scheduled to happen on March 31 is likely to have been an issue, according to Investec Ireland chief economist Philip O’Sullivan.

“When set against the backdrop of heightened Brexit uncertainty and international trade spats, it is not a surprise to see that Irish SMEs adopted a defensive posture with regard to leverage in the opening months of 2019,” he said.

Of the 15 segments of SMEs tracked, only three saw an increase in new lending activity.

Even so, the credit data suggests the economy is performing highly despite continuing to deleverage, he said.

Borrowing costs are rising, however.

The weighted average interest rates on outstanding SME loans increased slightly in the first quarter of this year to 3.51pc.

New lending rates are higher, and now stand at 4.14pc for new drawdowns with the highest costs in sectors including agriculture and transport/storage that are likely to be on the economic front lines in the event of a no-deal or crisis Brexit.

The rise in the cost of debt for businesses is in contrast to the declining cost of credit to lenders.

The ECB’s indication that monetary policy is set to become even looser, with potential interest rate cuts on the way, has pushed down borrowing costs on capital markets.

Borrowing costs were already low for the banks.

Last year the main banks stopped using the State’s Strategic Banking Corporation of Ireland (SBCI), which was set up to channel low-cost finance to SMEs, because the lenders were able to access cheap money in their own right.

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ECB won’t raise rates until at least mid-2020

ECB won’t raise rates until at least mid-2020

The European Central Bank yesterday signalled that it would not raise interest rates until the first half of 2020.

That compares to a previous guidance that pointed to a rate rise towards the end of this year – something that, in itself, was a delay on its previous plans.

The decision comes as the euro zone’s lacklustre economic recovery faces new headwinds – including China’s slowdown and transatlantic trade tensions.

“Over the last three to four weeks we’re beginning to see central banks across the world decide that they need to support the global economy more,” said Niall Dineen, chief investment officer with Appian Asset Management.

“We’re see rate cuts out of Australia and New Zealand and we’re seeing the Federal Reserve in the US talk about cutting rates as well. So I don’t think it’ll be a huge surprise that we’ve seen the ECB getting on board with everybody else,” Mr Dineen said.

This is a marked turn around from 12 months ago, when most central banks were moving rates upwards and the ECB was poised to follow suit.

According to Mr Dineen a number of factors, but particularly those around global trade, are weighing on economic performance.

“I think the reality is that the trade war rhetoric that we’ve been listening to over the past twelve months has had a real impact on the global economy,” he said.

“There is also weakness in China. There’s a real risk that parts of the Chinese economy could be in a recession and a lot of this is dragging down economic growth numbers across the globe,” he added.

That is prompting central banks to look again at offering supports to economies – rather than trying to take the heat out of markets with rate rises.

The problem for the ECB is that its interest rate remains at zero – while it already has trillions of euro of bonds on its balance sheet from the recently-completed round of quantitative easing. That leaves it with limited scope for further stimulus measures should the euro zone economy require it.

“Central banks will argue that they can always do more on the rate side in terms of forcing banks to lend, or they can do more quantitative easing,” Mr Dineen said.

“But maybe the reality is that the next part of support for the economy has to come from governments and has to come from fiscal spending – maybe that’s the thing that’s been lacking in this cycle. We have to get away from this idea that it’s always going to be central banks that provide this support,” he stated.

The support Europe’s central bank may be willing to offer could also hinge on the person at the helm, as Mario Draghi is due to step down at the end of October. His successor could set a different tone for the authority following what has been a prolonged period of accommodation.

“We have to recognise how positive Draghi has been for Europe,” Mr Dineen said. “He has put the ECB front and centre of keeping the euro zone together as it went through its own crisis and keeping the stimulus measures in place.

“Is there a risk that if we get, maybe, a German head of the central bank that the underlying philosophy will change? I think it’s a small risk – I don’t think it’s a huge risk,” he stated.

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ECB still has ammunition left to fight recession – Lane

ECB still has ammunition left to fight recession – Lane

The European Central Bank’s policy arsenal has not been depleted and fiscal policy could help stimulate investment, the ECB’s incoming executive Board member Philip Lane has said.

Investors fear the ECB’s window to potentially raise interest rates has closed, meaning it has little in its toolkit to face the next recession.

But in some of his first public remarks since securing the job of replacing current ECB chief economist Peter Praet, Central Bank Governor Philip Lane said the ECB still had options.

“The idea that the ECB lacks potency is very far from where we are,” he told academics and diplomats at Ireland’s embassy in London.

Professor Lane added that fiscal policy could also help reduce policy uncertainty, and encourage the private sector to resume investing.

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Safe-haven Euro zone bonds dented by Brexit but buffered by ECB

Safe-haven Euro zone bonds dented by Brexit but buffered by ECB

Germany’s 10-year bond yield edged up on Thursday as a no-deal Brexit was avoided for now but held firmly below zero percent thanks to a signal from the European Central Bank that it will do all it can to fight low economic growth and inflation.

European Union leaders early on Thursday gave Britain six more months to leave the bloc, meaning it will not crash out on Friday without a treaty to smooth its passage.

The news bought some relief to markets but the selloff in safe-haven assets such as German government bonds was limited as investors focused on the dovish message being sent from major central banks.

ECB President Mario Draghi on Wednesday raised the prospect of more support for the struggling euro zone economy if its slowdown persisted, saying the ECB had “plenty of instruments” with which to react.

And minutes from the Federal Reserve’s March meeting released on Wednesday showed the Fed is likely to leave interest rates unchanged this year given risks to the US economy.

Germany’s 10-year bond yield was up around a basis point at minus 0.023pc, off Wednesday’s one-week low.

Still, having spent much of the past week skirting around the zero percent level, German Bund yields are back within sight of 2-1/2 year lows hit last month after Draghi flagged the ECB is looking at ways to offset the impact of negative interest rates.

“The April ECB meeting had a dovish ring to it which, put in the context of the March dovish surprise and stabilisation of economic indicators, caught rates markets off guard,” said Antoine Bouvet, a rates strategist at Mizuho in London.

“What really stood out was his (Draghi’s) willingness to signal the ECB is studying whether NIRP (negative interest rate policy) side-effects need mitigating.”

Across the euro area, benchmark 10-year bond yields were around a basis point higher on the day .

Renewed talk about further ECB policy measures to lift economic growth, especially the notion of tiered interest rates, means speculation about euro zone rates is starting to build.

Eonia money market futures dated to the ECB’s December meeting price in 1.5 basis points worth of rate cuts, which analysts say equates to roughly a 15 percent chance of a 10 basis point rate cut.

“Since there is no new evidence that issuer limits could be raised, for QE (quantitative easing) to be restarted, the logical conclusion would be that rate cuts may have to be reconsidered in the future under an adverse scenario,” said Pictet Wealth Management Frederik Ducrozet, referring to the ECB’s rules for asset purchases.

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