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A changing climate: ECB gears up for new missions
FRANKFURT AM MAIN, Dec 13, 2019 (BSS/AFP) – The European Central Bank’s
new president Christine Lagarde on Thursday announced that the Frankfurt
institute would begin a year-long “strategic review” in January, its first
since 2003.
Here is how the ECB’s strategy has developed over the years and what
prompted the decision to reassess it.
– What is the ECB strategy now? –
The ECB’s overriding mandate is to ensure price stability.
In 2003, its main decision-making body, the governing council, defined
that goal as an inflation rate of “just below, but close to” two percent, a
level that would encourage investment and employment, while warding off
deflation.
But inflation has remained stubbornly low at around one percent despite
years of easy-money policies, a phenomenon that has left many economists
around the world scratching their heads.
Different theories have been put forward as to a possible explanation,
from the rise of the casual “gig” economy to political shocks such as trade
tensions and Brexit.
Critics of the bank’s ultra-loose monetary policies meanwhile have long
argued that its record-low — and even negative — interest rates, as well as
its massive “quantitative easing” bond-buying programme, are detrimental to
savers and help accentuate asset price bubbles.
The review will be “an ideal opportunity for Christine Lagarde to reflect
on the unconventional crisis measures adopted over the past decade,” Pictet
Wealth Management strategist Frederik Ducrozet said.
– Inflation –
At her press conference Thursday, Lagarde said discussions about whether
the central bank should tweak the inflation target and change the way it
calculates price growth would be at the “core and centre” of the review.
She even explicitly mentioned the possibility of including housing costs
in the calculations.
A change in the inflation target to “around” two percent instead of “just
below”, would be “desirable and plausible, if only to make forecasts simpler
and more credible,” Ducrozet said.
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– Climate change –
Lagarde said the upcoming review would also “include the immense challenge
that climate change is addressing to each and every one of us”.
The promise comes as the ECB faces intense pressure from environmentalists
and lobbyists to green both its own operations and its investments in the
wider economy through its bond-buying scheme.
Lagarde acknowledged this month that “the ECB’s mandate is not climate
change”, but said climate risks could be built into its economic forecasting
and other aspects of its work, such as banking supervision, without
compromising the price stability target.
The planned review would also look at the impact of “massive technological
changes” in recent years and rising inequality, she added.
– Transparency –
While Lagarde did not raise it on Thursday, she has in the past suggested
that the way the ECB communicates with the outside world could be improved.
Until now, ECB meetings have been shrouded in more secrecy than those of
other central banks, with an “account” published only weeks later that
neither names participants, nor reveals the voting record of individual
governing council members.
“We think the bank may move to a more transparent and systematic process
of voting on major policy decisions,” said Capital Economics analyst Andrew
Kenningham.
The debate has been given fresh urgency following the decision by the
ECB’s governing council in September to restart a monthly asset-purchasing
scheme, which led to a rare public row where dissenters aired their
grievances in the media.
Lagarde has also vowed to ditch some of the bank’s notorious jargon where
a single word can move markets, but remain incomprehensible to outsiders.
Lagarde has said she wants to “dust off” the bank’s language to help
citizens understand “what the ECB is for”.
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