The European Central Bank is expected to mull its definition of price stability, with potential consequences for its future monetary policies (Boris Roessler)

Frankfurt am Main (AFP) – With policy locked in easy-money mode, European Central Bank watchers will look Thursday for hints about its strategic review and an updated assessment of risks facing the eurozone economy.

President Christine Lagarde will “be able to enjoy her honeymoon period without having to worry about immediate policy decisions,” said Andrew Kenningham of Capital Economics.

In her first three months in post, the former IMF chief and French finance minister has invested much energy into overcoming divisions prompted by a September decision — taken under predecessor Mario Draghi — to ease monetary policy once more.

Helped by turnover in jobs on the ECB’s 25-strong governing council, Lagarde has managed to treat some of the wounds sustained before she took over.

But onlookers are increasingly impatient to hear from her about a planned “strategic review” of the bank’s tools and goals.

The institution’s last stock-taking in 2003 took place several years before it intervened massively in inter-bank markets amid the global financial and economic crisis.

– Inflation goal –

“The most important part of the review will be an assessment of the definition of price stability and how to reach it,” said economist Carsten Brzeski of ING bank.

For most of its active life, the ECB has aimed for inflation “close to, but below two percent” to fulfil its mandate to keep eurozone prices stable.

But over the past seven years, it has failed to achieve that goal despite unprecedented policy experiments.

One option would be to simply target inflation “around” two percent.

Such “symmetry” in the inflation target could mean the bank would not immediately hit the brakes once inflation approaches two percent, instead potentially allowing it to overshoot a bit.

That “would allow the ECB to actually take it easy” and stick to its present negative interest rates for longer, Brzeski said.

What’s more, “such a clarification of the target would be helpful… to limit disagreement in the governing council,” added Goldman Sachs chief economist Alain Durre.

On top of the ECB’s headline goal, the review could also tackle issues like making decisions more consensual, side effects of policy tools like bond-buying and negative rates, and how to take climate change into consideration.

Lagarde has identified climate action as a new frontier for central banking, while retaining price stability as the ECB’s primary mandate.

– Shifting risks –

The ECB chief’s judgement of risks facing the euro area will also be closely scrutinised Thursday.

Lagarde suggested in December that dangers have become “less pronounced”, a nuance quickly picked up on by financial markets.

Since then, signs of clouds beginning to clear over the global economy have multiplied, including prospects for an orderly British exit from the EU at the end of January.

The International Monetary Fund — Lagarde’s old patch — this week pointed to a “moderate pick-up in global growth” ahead.

And the US-China trade conflict, with its harmful knock-on effects on Europe, has been soothed for now by a new trade deal.

On Wednesday however, President Donald Trump levelled new threats of car import taxes against the EU.

“I wanted to wait till I finished China” before targeting Europe, he told reporters at the World Economic Forum in Davos, Switzerland.

For now, analysts suspect a slowdown in eurozone manufacturing might be bottoming out, while inflation picked up slightly last month to an annual rate of 1.3 percent.

“We expect the ECB to acknowledge these developments with a more upbeat risk assessment,” Goldman Sachs economist Durre said, although “this does not signal a turn towards tighter policy”.

That should leave rates on banks’ deposits in Frankfurt at minus 0.5 percent, in effect charging lenders for cash they park with the ECB in hopes they will lend more of it to households and firms.

Some economists predict the ECB will lower rates further this year if no pickup in growth and inflation is forthcoming.

Meanwhile “quantitative easing” (QE) bond-buying is expected to continue for now, with purchases of 20 billion euros ($22.2 billion) worth per month.

Disclaimer: Validity of the above story is for 7 Days from original date of publishing. Source: AFP.