Lagarde says ECB will be ‘resolute’ on inflation mandate

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Christine Lagarde said the European Central Bank will be “resolute” in restoring euro-zone price stability under her presidency, while stressing that an upcoming strategy review will be wide-ranging, including climate change as well as inflation.

“The ECB’s accommodative policy stance has been a key driver of domestic demand during the recovery, and that stance remains in place,” she said in her debut appearance as president at the European Parliament. She holds her first monetary policy meeting at the ECB on Dec. 12.

Lagarde said it would be premature to prejudge the review, and declined to say how long it will take, noting only that it “will be guided by two principles: thorough analysis and an open mind.” This could involve widening the variety of groups and people that provide input.

She acknowledged the side effects of the ECB’s ultra-loose policy and said the review will try to gain a better understanding of how longer-term trends affect what the central bank can control.

Inflation has yet to return to the goal of “below, but close to, 2%” despite years of pumping liquidity into the financial system, and the ECB itself has become increasingly concerned that its policies might threaten financial stability. That’s prompted increasing calls from officials and from Lagarde’s predecessor, Mario Draghi, for more fiscal support from governments.

Many of the questions at the parliament hearing focused on climate change, an area where the central bank has come under increasing pressure to play a bigger role.

Pollution Bonds

However, Bundesbank President Jens Weidmann has warned against heavy-handed steps such as barring the bonds of polluters from QE, as proposed recently by a group of activists and academics in an open letter to Lagarde.

Lagarde said she agreed with Weidmann, but that it doesn’t stop the ECB looking into incorporating climate change into its operations, economic analysis and bank supervision.

She also revealed she has met with the authors of that letter. Some of the discussion focused on how to include civil society groups in the review, and she also indicated that her priority was to get the Governing Council on board, according to a person who attended the meeting, asking not to be named.

At the Parliament hearing, Lagarde said that while the ECB’s primary mandate is price stability, the secondary mandate — to support the general economic policies of the European Union — can cover climate change. European Commission President Ursula von der Leyen has pledged to turn Europe into the first climate-neutral continent in the world by 2050, and green parties made significant gains in recent parliamentary elections.

In the review, the first since 2003, ECB policy makers will probably tweak the inflation target but struggle to go much further than that, according to officials with knowledge of the matter.

It might conclude with a goal of 2%, as some governors worry the current, vaguer, target, risks leaving inflation too weak. A more radical change to measuring and achieving price stability is probably too ambitious, said the people, asking not to be identified because the discussions are private.

Read more: ECB Review May Reset Inflation Aim to 2% But Struggle to Do More

We must “ask ourselves, this is what was defined in 2003. and in view of all the changes that have taken place, of structural trends, whether that price stability definition, the objectives that are framing the price stability mandate, whether they are still valid,” Lagarde said.

“The ECB would be minded to opt for a more ambitious and clear inflation goal that could push inflation expectations up rather than down,” Nick Kounis and Aline Schuiling, economists at ABN Amro Bank NV wrote in a note. “Having said that, there is a lot of disagreement on the Governing Council on this topic, which could limit progress.”

Asked to predict what the inflation rate will be in eight year’s time when her term ends, Lagarde demurred.

“I don’t think that anybody in their right mind would venture to forecast any number, be it growth or inflation, eight years from today,” she said.

Source from: The Peninsula