Lagarde warns markets not to assume policy on autopilot

Bloomberg

European Central Bank (ECB) president Christine Lagarde warned investors not to assume that current monetary policy is locked in for the foreseeable future just because officials are focused on reviewing their strategy.
“To those who think it’s on autopilot, that’s ridiculous,” she said in a Bloomberg Television interview at the World Economic Forum in Davos, Switzerland. “Let’s look at the facts. Let’s look at how the economy evolves.”
Lagarde spoke a day after announcing the first reappraisal of the ECB’s inflation goal and tools since 2003, in a process that won’t conclude until around December. With the euro-area economy stabilising and a stimulus package already in place, few analysts see much chance of a change in policy any time soon.
Economists predict the quantitative-easing programme, which was resumed by former president Mario Draghi just before he handed over to Lagarde in November, will run until the end of next year, with interest rates on hold until early 2022. Markets aren’t pricing a change in rates until at least mid 2021.
Still, the economic threats haven’t entirely subsided. Data showed private-sector activity remained muted at the beginning of 2020, despite signs of a pickup in Germany. In its policy meeting, the ECB continued to describe the risks to its outlook as tilted to the downside, if less pronounced. US president
Donald Trump used his appearance in Davos to revive the prospect of tariffs on Europe’s car industry.
“The ECB is still far from bringing inflation to its target and we believe it will act in the next few months,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “I don’t think a central bank like that can close the shop for a year.”
Lagarde said the rethink will be separate from the monetary-policy decisions that the Governing Council takes every six weeks.
Policy “will be conducted irrespective of the strategy review,” she said. “So to those who say it’s going to be completely static and stable for 12 months, I say ‘ah, watch out,’ because things change and we might have different signals and we might reconsider. We might. I don’t know at this point in time.”

Scant Details
Details on precisely what policy makers will study in their review were scant, beyond general observations that it will be wide-ranging and focus on topics such as financial stability and climate change. The key question for the ECB is why it has fallen short of its inflation goal of “below, but close to 2%” for years.
Lagarde has her own views on what needs to be done but says she doesn’t want to disclose them for fear of influencing the debate before others have had their say. The intention is to reach out to academics and the wider public via national central banks.
“I know some people are disappointed that we didn’t say much more,” Lagarde said.
“But a strategy review starts here and finishes there, and you cannot say here what you’re going to do there — otherwise you don’t do a strategy review.”