Business The ECB keeps interest rates low but rethinks its...

The ECB keeps interest rates low but rethinks its strategy

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The European Central Bank has announced that it has kept its interest rates at an all-time low and will continue with the public debt repurchase program. The ECB Board of Governors has also approved the launch of a process to review the agency’s strategy, as Lagarde had announced last December.

The institution chaired by Christine Lagarde does not see a rise in prices in the eurozone, so it will continue with expansionary policies, with no end date. The basic rates will remain at 0%, while the interest on short-term banking and deposit loans will remain unchanged at 0.25% and -0.5%, respectively.

The purchase of bonds, the most controversial measure of the monetary entity and to which it earns € 20 billion a month, also remains unchanged and without a date to end. According to Lagarde, the debt securities acquisition program will continue until inflation picks up. Also, the proceeds from these bonds will be reinvested in the same program, in this case even beyond a possible future rate hike.

In fact, the continuation of the ECB’s policies is justified by low inflation in the euro area. The institution chaired by Christine Lagarde believes that prices are growing too slowly and do not expect them to rise in the short term. In this regard, inflation in the 19 Eurozone states as a whole was 1.3% last December, far still from the official “near but less than 2%” target set by the internal regulations of the bench.

Lagarde, continuator: ECB keeps interest rates at record lows

As in her first press conference, and just as her predecessor Mario Draghi did, for years before her, Lagarde said that low inflation is mainly due to low economic growth, caused by international trade tensions. , especially by the China-US tariff war, and by the Brexit. However, the ECB chair believes that “the risks” for the euro area are “less pronounced as uncertainty is diminishing”. As an example, he mentioned the agreement between the Chinese and US governments.

Despite this, Lagarde has maintained the call – also inherited from Draghi – to the Eurozone state governments to differentiate their tax policies. For the ECB, the most indebted countries should pursue policies designed to reduce the deficit, while those states with more margins should carry out tax cuts or increases in public spending to encourage economic growth, which at the same time would have an effect bullish on inflation.

In fact, the banker has been optimistic that the Eurogroup – the body that brings together the economic ministers of the 19 euro countries – has also taken over the idea that states should act in accordance of your financial situation. “Two countries with fiscal margin are seriously considering expanding their budgets, so we are making progress,” he said.

Review of the strategy

Apart from the rate decision, the ECB has officially announced the launch of a process to review its monetary policy strategy. This process – which has not been going on since 2003 – will take about a year, according to a statement from the agency, and will include consultations with other European institutions, governments, social agents and other economic actors. “The review will be about how we comply, how we measure and communicate decisions and publications,” said Lagarde.

Draghi says goodbye to the Eurocambra, stating that interest rates can be further cut

But the review has a strong political component, because it opens the door to hypothetical changes that until recently seemed unthinkable at an institution like the ECB. “Downward growth trends, slower productivity and an aging population, as well as the legacy of the financial crisis, have lowered interest rates and reduced the margin for the ECB and other central banks to take its policies are conventionally implemented, “the bank said in a statement. That is to say, the institution believes that the economic situation has changed so much in the wake of the crisis that it is necessary to review its entire operation to make sure that it can continue its work efficiently.

According to Xavier Freixas, Professor of Financial Economics at UPF, it makes sense to “rethink” the bank’s strategy. The Nordic countries are currently buying public debt, which they consider to be long-term negative for the ECB and unfair, as they serve to finance the southern states. However, Freixas sees the ECB’s concern as low inflation “legitimate” and serves as a justification for the bank’s expansive measures that are so upset in northern Europe.

“We cannot operate as in 2003. This does not mean that we have to change one thing or the other, but we need to have a complete view of the effectiveness of our monetary policy,” said Lagarde of the need for such a review. . An opinion that is in line with Freixas, who considers it logical in this context that the ECB rethink its policy. However, it is unclear whether a strategy will be found that will satisfy both the northern and southern states.

Draghi goes away, politics come in

Reassessment should also be used to analyze possible new measures. Lagarde already stated last year that new tools will be considered, including the so-called helicopter money, a system by which the Central Bank gives citizens money for nothing, such as a basic income. The ECB president wants the regulatory body to have a closer relationship with the citizenry: “We will listen to people’s expectations and understand their concerns better,” he said.

Lagarde’s political profile as chair of the EU’s most technocratic institution became apparent from the outset. However, the Frenchwoman is committed to the independence of the institution and the autonomy of the governing body. “I am not a despot president, all views are welcome,” she said.

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