FRANKFURT (Reuters) - The European Central Bank is launching a fresh strategy assessment seen covering some big questions on the way it works - from whether massive bond buys remain a good policy tool, to what role it should play in the fight against climate change.

These are the policy areas likely to be under review before a final report due around mid year which could bring incremental shifts in policy:

BOND BUYS

Bond buys or quantitative easing was a key plank of ECB policy in the decade before the pandemic but some policymakersare openly questioning its merits.

The ECB bought trillions of euros worth of debt in the hope of boosting inflation when price growth was too low but 4 trillion euros of these assets are still on the books, years after stimulus ended, since it takes years to unwind the buys.

"As bond holdings can be unwound only gradually, asset prices will remain distorted for a long time," ECB board member Isabel Schnabel said late last year. "It means that the bar for starting QE should be higher than in the past."

Some policymakers want the ECB to acknowledge that quick bursts of bond buys are effective, like during the pandemic, but costs outweigh benefits in case of lengthy purchases.

While profits are not a core activity, massive QE also left the ECB with record losses, depriving governments of dividend income.

Since the ECB made clear it would intervene in markets if policy transmission was impaired, some policymakers have also called for a clearer distinction between instruments used to fight inflation and those aimed at market stability.

ESPECIALLY FORCEFUL ACTION

The review will steer well clear of questioning the ECB's main goal of targeting inflation at 2% but could broach whether, in future, falling just short of that threshold is so bad that it requires extraordinary measures.

The ECB's strategy calls for "especially forceful" action when inflation is too low, suggesting that undershooting is seen as a bigger problem than overshooting.

But evidence suggests that prices tend to be rigid on the way down, so only huge shocks lead to outright deflation.

Even during the ultra low inflation decade before the pandemic, firms and households continued to expect modestly rising prices.

If the ECB is serious that its 2% inflation target is symmetric, then there should be no distinction between the approach to under and overshooting, some argue.

Especially forceful action, since it normally means copious bond buys, also sows the seeds of financial distortion.

CLIMATE

The ECB committed to an "ambitious" climate action plan in 2021. But achievements have been limited.