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'Wise owl' Lagarde outlines broad ECB review, pledges new style

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12/12/2019 | 11:41am EST
European Central Bank hold a news conference in Frankfurt

Christine Lagarde struck a more upbeat tone on the economy in her first news conference as head of the European Central Bank on Thursday and promised a new style of leadership as she outlined a sweeping one-year review of the bank's workings.

With the euro zone economy barely expanding, the former IMF chief firmly embraced the ECB's easy money policy but suggested that the worst of the bloc's slowdown may now over and an often-discussed but elusive recovery could now begin.

Lagarde also tackled head-on the keen anticipation in markets and media about how she would follow on from predecessor Mario Draghi, a technocrat who was hailed as one of the world's best communicators with a deep understanding of monetary policy.

"I will have my own style. Don't over-interpret, don't second-guess, don't cross-reference. I am going to be myself and therefore probably different," she told reporters in what she billed as a short preamble before taking questions.

Rejecting the traditional labels of the central banking world, Lagarde said she was neither a policy hawk nor a dove, but rather an owl, who will use her wisdom to create the broadest possible consensus to heal a recent rift in the Governing Council.

"Lagarde’s clear desire to seek consensus could be a sign that the hawks will be able to affect policy decisions somewhat more than during Draghi’s tenure," Kjersti Haugland, an economist at DNB said.

REVIEW

The planned review of how the ECB does business would start in January and aim to conclude by the end of the year, drawing from a wide range of voices, including those from civil society and academia.

"It will aim not just preaching the gospel we think we master but also listening ... There is no preconceived landing zone at this point in time," she added of the exercise, which mirrors a similar endeavour under way in the United States.

U.S. Federal Reserve chief Jerome Powell has also struck a much more consumer-friendly tone since taking over last year although markets only expect a minor change in how it defines its own inflation target.

While the ECB's own review will also centre on the definition of the target, Lagarde said it would also weigh fundamental issues including how technology and climate change affect policy, and how to address rising inequalities in developed economies.

The ECB targets inflation at just below 2% but has undershot this mark since 2013 and some argue that fundamental factors that guide inflation have changed, keeping a permanent lid on prices.

To take pressure off the bank, some have argued for more flexibility around the target, giving the ECB leeway since it has already exhausted conventional policy instruments and relies of untested tools such as bond purchases and ultra cheap loans to banks.

NOT THE AIM

Financial analysts see the ECB on hold throughout next year, a view that was strengthened by the Fed signalling on Wednesday that it was unlikely to touch U.S. interest rates in 2020.

Lagarde's first policy decision and the bank's new staff projections did nothing to dispel those expectations.

The ECB held its deposit rate at a record low minus 0.5% while keeping the option of another rate cut firmly on the table. It also promised low interest rates for an extended period and kept the pace of bond purchases, aimed at lowering borrowing costs, steady at 20 billion euros (£17.18 billion) a month.

The biggest change was arguably a tweak to the ECB's guidance on growth, suggesting that risks were less pronounced, mostly as trade tensions appear to be easing and the UK election could bring clarity on Brexit.

The new staff projections were also little changed, even if initial 2022 figures showed that inflation would still undershoot the ECB's target.

Still, both inflation and growth were expected to trend upward, indicating that the direction was good even if the absolute levels were not.

For 2022 inflation was seen 1.6%, with price growth hitting 1.7% in the final quarter of the year.

"It is certainly directionally good. But is it the aim that we pursue? No."

By Balazs Koranyi and Francesco Canepa

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