ECB to announce soon the start of the first strategic review since 2003 – ING

Carsten Brzeski, the Chief Economist ING Germany, notes that during her first appearance at the European Parliament as ECB President, Christine Lagarde left no doubt that the ECB will soon announce the start of the first strategic review since 2003.

• "Reading between the lines and also taking into account Isabel Schnabel’s comments at her hearing at the European Parliament this week, it appears that the ECB wants to take a broad approach, with no limits. In our view, it is very likely that Lagarde will announce the start of this review at next week’s ECB meeting. This is the first ECB policy meeting since Lagarde came into office.
• With the experience of 2003 in mind and current (and new) challenges for central banks in a low growth, low inflation and negative interest rate environment, we expect the ECB’s review to eventually focus on four main issues: the definition of price stability, how to interpret the mandate, climate change and communication.
• Here is what the issues are broadly about and our current take on the possible outcome.

1. Definition of price stability. While more hawkish central banks have been arguing in favour of lowering the ECB’s inflation target, inflation differentials and deflationary risks argue in favour of sticking with or even increasing the target. Also, there should be a discussion about a single point target versus a range and the question of whether the ECB should tolerate an overshooting of its inflation target to make up for a period of undershooting the inflation objective.
2. Changing the mandate and including climate change. Recently there have been calls on the ECB to include measures to tackle climate change. These calls received more support in Lagarde’s latest comments at the European Parliament. 
3. Communication. A lot has been written about possible changes to communication. Ideas like dot plots or releasing voting records have been around for a while.

• Currently, Lagarde is trying to give the impression that no stone will be left unturned and that the review will be extremely broad. We don’t expect any conclusion of such a review – which has not even started yet – before the second half of 2020. Our current guess is that expectations should not be set too high. A change of the price stability definition to “around 2%”, along with some incorporation of climate change and more communication transparency looks like a possible outcome. However, before any of these conclusions materialize many stones will have to be turned."