23 January 2020

Financial Times: ECB kicks off policy battle as Christine Lagarde launches strategic review

The European Central Bank will examine whether it should alter its €200bn corporate bond holdings to take account of climate change, Christine Lagarde promised as she launched its first strategic review in 16 years.

The central bank, which kept its ultra-loose policy rates unchanged on Thursday, said it would reconsider the inflation target that defines its core price-stability mandate, along with the effectiveness and potential side-effects of the tools used to achieve it.

It also set up a battle over how much central banks should do to tackle climate change by promising to examine “how other considerations, such as financial stability, employment and environmental sustainability, can be relevant in pursuing the ECB’s mandate”.

Economists said the ambitious agenda for the review, combined with the deep divisions within the ECB’s governing council and the compressed timetable, meant they expected the process to produce only modest policy changes.

We don’t think this is going to be a walk in the park,” said Katharina Utermöhl, senior economist for Europe at Allianz. “These are pretty fundamental questions and there have been divisions within the council, so just having a review doesn’t mean there will be unity on how they should be resolved.”

The process starts at a time when central banks are grappling with doubts about whether their main tools have lost their effectiveness, as inflation remains stuck below their targets despite years of accommodative policy measures.

Ms Lagarde said on Thursday it would be a “broad exercise” and that the ECB “cannot operate as we did back in 2003” — the only other time it has carried out a review.

“It will have to do with how we deliver, how we measure what tools we have, and how we communicate,” she told a press conference. “I am not a despotic president — all views are welcome . . . but it may be that we do not have unanimity and it will have to be a majority decision.” [...]

Ms Lagarde said about €1bn of the ECB’s pension fund assets had shifted into green investments. She added that its review would look at “how much the bank can do or should do” along similar lines with the €200bn of corporate bonds it has bought via its €2.6tn quantitative easing programme to prop up the eurozone economy, and assess “whether it collided with our mandate”.

That would be unacceptable to some members of the ECB governing council, such as Jens Weidmann, head of Germany’s Bundesbank. Critics say it is up to politicians, not central banks, to decide which companies to favour and which to penalise.

ECB review must explore monetary policy’s effect on supply Premium Ms Lagarde said risks to the bank’s growth outlook remained “tilted to the downside”. But she added that the risks were “somewhat less pronounced” after a “moderate increase” in inflation and a partial deal over tariffs between China and the US. [...]

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Related column on Financial Times (subscription required): The ECB should ditch its inflation target

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