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ECB Set To Maintain Status Quo In Lagarde's First Policy Meeting

The European Central Bank is set to leave its monetary policy unchanged on Thursday in the first meeting chaired by its new chief, Christine Lagarde, and markets will be closely watching how she communicates the message from the central bank on the euro area economy amid sluggish growth and low inflation.

The ECB is widely expected to leave interest rates and stimulus measures unchanged, and reaffirm its forward guidance, following the Governing Council session.

Former French finance minister Lagarde came to the helm at the ECB after Mario Draghi’s term ended on October 31.

“We don’t expect Lagarde to structurally change the introductory statement but will?be looking for any changes in style and language in the Q&A session,” ING economist Carsten Brzeski said.

The former IMF managing director has already announced that a strategic review of the ECB policy will start soon.

She is likely to face a volley of questions on the planned strategic review, and whether the split in the Governing Council over the recent stimulus measures is healed or not.

The startegic review is likely to be a long, drawn-out affair with a wide remit, Captial Economics economist Andrew Kenningham said.

The ECB currently targets inflation “below, but close to 2 percent”.

“In practice, any change to the target is likely to be controversial, take a long time to agree and ultimately be pretty small,” the economist said.

While Thursday’s meeting will be the first chance for the Governing Council officially to discuss the review, President Lagarde may want to wait for the new Council members, Isabel Schnabel and Fabio Panetta, to take up their posts in January before finalizing its scope, Kenningham added.

Eurozone interest rates were raised last in July 2011 by 25 basis points.

The main refi rate is at a record low zero percent, and the deposit rate is at -0.50 percent after it was cut by 10 basis points in September. The marginal lending facility rate is at 0.25 percent.

The policy announcement is due at 7.45 am ET and Lagarde is set to make her first post-decision press conference at 8.30 am ET.

Policymakers would prefer to stick to their wait-and-watch stance to let the stimulus measures announced in September to have an effect on the real economy.

Lagarde will also be unveiling the latest set of ECB staff macroeconomic projections for Eurozone.

“The latest round of staff projections will very likely confirm the September projections,” Brzeski said.

“The first official ECB forecasts for 2022 are of more relevance,” the economist added.

In September, the ECB staff cut the euro area inflation forecast for this year to 1.2 percent and the outlook for next year to 1 percent. The projection for 2021 was trimmed to 1.5 percent.

Eurozone growth forecast for this year was cut to 1.1 percent and the projection for next year was lowered to 1.2 percent. The 2021 growth outlook was retained at 1.4 percent.

Responding to a weak Eurozone outlook, the ECB announced of a host of stimulus measures in September that included a further reduction to the already-negative deposit rate and the restart of asset purchases.

The bank also introduced a tiering system that will reduce the cost to banks when they deposit money with the ECB as the deposit rate is now negative.

The material has been provided by InstaForex Company – www.instaforex.com