ECB holds interest rates steady and launches strategic review

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
New European Central Bank (ECB) President Christine Lagarde. Photo: Ralph Orlowski/Reuters

The European Central Bank (ECB) on Thursday held interest rates steady, as widely expected, and launched its first strategic review since 2003.

The ECB announced it was holding the headline interest rate unchanged at 0% and the deposit rate unchanged at -0.5%. Economists had expected no changes, with growth remaining sluggish across Europe.

The IMF said last week it expects euro area GDP to grow by just 1.3% this year, behind other advanced economies like the US and UK. ECB chief Christine Lagarde said at a press conference on Thursday that euro area real GDP grew by just 0.3% in the third quarter of 2019.

“Moderate growth reflects the ongoing weakness of international trade in the environment of continued global weakness, which has particularly affected the euro area manufacturing sector and dampened investment growth,” Lagarde said.

The ECB said in a statement that interest rates would remain “at their present or lower levels” until inflation starts climbing towards its 2% target. Eurozone inflation currently stands at 1.3%.

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The central bank also maintained its asset buying programme at a rate of €20bn per month and pledged to reinvest funds from maturing investments back into re-purchases. The ECB said this programme would “run for as long as necessary” and end just before rates are hiked.

The euro (EURUSD=X) was unchanged against the dollar and pound (GBPEUR=X) in the wake of the announcement.

Lagarde urged governments to step in and start spending to make the most of the ECB’s loose monetary policy in order to boost growth.

“In order to reap the full benefits from our monetary policy measures, other policy measures must contribute more decisively,” she said.

“Governments with fiscal space should be ready to act.”

Asked about a potential trade war between the US and EU, Lagarde said she was “encouraged” by conversations between US president Donald Trump and European Commission leader Ursula von der Leyen at Davos this week. However, she said the ECB would be monitoring the situation closely.

Alongside the rates decision, the central bank announced it was kicking off “a review of the ECB’s monetary policy strategy.” It is the first such strategy review since 2003.

“We are going to review a whole host of issues,” Lagarde said. “Yes it will have to do about how we deliver, how we measure, what tools we have, and how we communicate. It will really encompass the entire communication approach when it comes to decision making, to publication, to the use of language that we have, to the outreach, to the engagement with all stakeholders.”

She said she would focus on listing to the concerns of ordinary citizens and communicating in way everyone can understand. She said the review would likely take all review.

“It’s a broad exercise,” Lagarde said.