European Central Bank president Christine Lagarde was slightly more upbeat yesterday about risks to the eurozone economy, and insisted climate change would be central to a rethink of the institution’s goals and methods.
Risks to the euro area “remain tilted to the downside, but have become less pronounced as some of the uncertainty surrounding international trade is receding,” Lagarde told reporters in Frankfurt.
While an orderly Brexit and a US-China trade truce have cleared some of the air around trade, President Donald Trump raised fears of a fresh row this week when he revived a threat to slap tariffs on European car imports.
But with European Commission president Ursula von der Leyen set for US-EU trade talks in Washington next month, “the tone and the determination on both sides to draw positive conclusions... I think is to be taken as a positive signal,” Lagarde said.
As expected, governors left interest rates at historic lows and maintained “quantitative easing” (QE) bond-buying purchases at yesterday’s meeting, the second chaired by Lagarde since taking the helm in November.
They also officially kicked off a major “strategic review” expected to last all year.
“We will not leave any stone unturned,” Lagarde reiterated, with the primary focus of the rethink how the bank defines its mandate of maintaining price stability, and how best to pursue it.
The institution’s last stock-taking in 2003 took place several years before the global financial and economic crisis forced it into unprecedented stimulus action.
Pressed repeatedly by reporters on how she sees different aspects of policy developing, Lagarde said it would be “unfair” to pre-empt the outcome.
“The toughest challenge will be how the ECB communicates (about the review) and the question of how to give a constructive outlet to differing opinions” once it’s over, economist Marcel Fratzscher of German think-tank DIW said.
Much of Lagarde’s first weeks and months in office were spent smoothing over differences, after an acrimonious battle over policy loosening broke out under predecessor Mario Draghi.
In a statement about the ECB’s planned review, the debate around the bank’s inflation target took pride of place.
For most of its active life, the ECB has aimed for inflation “close to, but below two percent” to fulfil its mandate to keep eurozone prices stable.
Over the past seven years, it has failed to achieve that level despite unprecedented policy experiments, including years of negative interest rates and over €2.6tn of QE.
One option would be to simply target inflation “around” 2%.
The ECB’s monetary policy toolkit and communications were equally prominent in the statement.
But Lagarde’s much-hyped push to bring climate considerations into policymaking received only a supporting role alongside financial stability and employment concerns.
“I’m aware” of objections that climate action could distract from the ECB’s primary objective, Lagarde said.
But she warned of “the danger of doing nothing”.
“Failing to try is already failing,” she insisted, adding that commitment to climate action “is now the determination of the European Commission, of many of the euro area leaders, and which is also now creeping into the private sector.”
With some signs pointing to decreasing risks and a rebound from 2019’s growth slowdown this year, policymakers will be hoping the ECB will be left in peace to determine its new direction without too many distractions.
“A substantial change of the ECB’s monetary policy...
before the end of the strategy review looks unlikely,” said ING bank analyst Carsten Brzeski.
“Binge-worthy and nail-biting ECB meetings will otherwise not return before the end” of the review, he added.
The International Monetary Fund — Lagarde’s old patch — this week pointed to a “moderate pick-up in global growth” ahead, although “policy missteps” could still derail it.
Nevertheless, some economists predict the ECB will lower rates further this year if no pickup in growth and inflation is forthcoming.
Meanwhile QE is expected to continue at €20bn ($22bn) worth per month well into 2020.
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