ECB to review its mandate with ‘open mind’, Lagarde says

ECB President, Christine Lagarde, during her first monetary dialogue in the European Parliament, on Monday (2 December). [European Parliament]

The European Central Bank (ECB) will embark on a strategic review of its mandate and instruments to achieve its inflation target of 2% with an “open mind”, its president Christine Lagarde said on Monday (2 December).

Speaking at the European Parliament’s committee on Economic and Monetary Affairs (ECON), Lagarde said that “the entire community” of central bankers today are debating how to best define their medium-term objective of monetary policy.

The ECB’s mandate is to ensure price stability with an inflation rate below but close to 2%. However, changes in the global economy are making it tougher to achieve this goal.

Eurozone inflation currently stands at 1% and inflation expectations are close to historical lows, Lagarde explained.

She told MEPs that it would be “premature” to detail the scope, direction and the timeline of the strategic review, as it has not been properly discussed by the ECB’s governing council but stated that the two guiding principles of the exercise will be “thorough analysis and an open mind.”

The ECB intends to conduct a “wide” consultation with stakeholders before concluding the review.

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The last time the ECB undertook a strategic review was in 2003. 

An important focus will be to determine whether the ECB main policy objective is still valid. 

The former IMF chief and French finance minister said that the review would look at whether the target should be symmetric, meaning it should be used to tackle both low and high inflation and not just the latter, and whether the ECB should have leeway in reaching that target.

Climate change will play an important role as part of the review, Lgarde explained, as the institution intends to see the impact of global warming on price stability. As part of its supervision role of Europe’s systemic banks, she said that the ECB will ask lenders for transparency disclosures and climate risks assessments.

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Bundesbank chief Jens Weidmann on Thursday (28 November) batted back calls for the European Central Bank to take a bigger role in protecting the environment, saying it was up to goverments and not the ECB to fight climate change.

‘Bear with me’

Lagarde’s intervention on Monday was her first monetary dialogue with MEPs, and she asked for patience from lawmakers.

“I’m indeed trying to learn German but I’m also trying to learn central bank language,” Lagarde told the MEPs.

“So bear with me, show a little bit of patience, don’t over-interpret, if I may say,” she said as she stumbled at times during her comments in the Parliament.

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Lagarde became ECB president after the last package of monetary decisions pushed through by her predecessor Mario Draghi, including the restart of the bond-buying programme, provoked public criticism from the central bankers of France, Germany, Austria and the Netherlands.

Draghi defended these measures as a necessary instrument to relaunch the European economy and lift inflation expectations.

But besides the monetary resources, the ECB is calling on national governments to take more action. Lagarde stressed that she is “concerned” about the low level of public and private investment.

Merkel ignores calls for bigger fiscal stimulus

German chancellor Angela Merkel resisted calls to increase public spending as pressure continues to grow from her country and abroad to avoid the austerity that worsened the euro crisis.

The ECB is calling on national governments with fiscal space to invest more to fuel the eurozone economy, as growth is forecasted to remain “weak”, Lagarde said. 

However, the risk of the economic slowdown turning into a recession is still small, according to the Frankfurt-based institution.

Digital currencies 

During her speech, Lagarde also touched upon the issue of the new digital currencies, including the Facebook-sponsored Libra.

The ECB is studying jointly with other central banks the feasibility of launching their own digital currency.

“A central bank digital currency would allow citizens to use central bank money directly in their daily transactions,” Lagarde said.

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But compared with previous statements by other ECB policymakers, the ECB president sounded more prudent about the feasibility of such an option, and said that its “optimal design” requires further analysis.

(Edited by Benjamin Fox)

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