The first meeting of the ECB’s governing council chaired by Christine Lagarde will not go down in history for monetary policy decision-taking. Beyond the light-hearted and straightforward tone, however, some points are worth making.
- “Neither dove, nor hawk, but an owl”
- The monetary policy status quo will be prolonged
- A strategic review of monetary policy tools in 2020
From the point of view of communication, the post-meeting press conference went well. This last council meeting of 2019 was newsworthy for being Lagarde's first as Chair after eight years of Mario Draghi presiding over matters and undeniably imposing his style.
Lagarde did not hesitate to remind the media that each president has his or her own style of communicating, and that it was not appropriate to make comparisons or overinterpret any statement. She cut the ground from under commentators’ feet by saying playfully: “I'm neither dove nor hawk and my ambition is to be this owl that is often associated with a little bit of wisdom”.
Wisdom will indeed be needed just as the first signs of growth stabilising in the eurozone emerge after the deterioration of recent months, while inflation pressures remains benign. The ECB's inflation forecasts were revised slightly downwards for 2021 (from 1.5% to 1.4%) and the figure for 2022 is still modest (1.6%). Lagarde said that inflation in Q4 2022 was expected at 1.7%, the numbers were therefore going ‘in the right direction’, although still short of the target.
Exhibit 1: ECB forecasts as of 12 December 2019
An inflation target revisited in 2020?
Lagarde announced that the ECB would launch a strategic review of its monetary policy framework in January. This should be completed ‘before the end of 2020.’ She indicated that such an exercise was not unusual and even found it to be ‘a little late’ given that the previous review took place in 2003.
She intends to involve members of parliaments, the academic community and civil society representatives in the process. In particular, the review should lead to defining how the inflation target is to be considered, and it is likely that the notion of a ‘symmetrical’ objective will be more firmly anchored in the conduct of monetary policy.
Debates about the effects of negative rates are beginning to stir at major central banks around the world. Lagarde was candid on this subject, while delivering a strong message. When asked about the existence of a ‘reversal rate,’ i.e. a negative policy rate whose adverse effects outweigh the positive impact normally observed in the event of a decline in rates when they are positive, she replied: “My understanding of the reversal rate is that you are facing a ‘reversal rate’ when credit begins to contract, which is not the case. Of course, we are keeping a close eye on credit developments in the private sector.”
Exhibit 2: Private sector credit growth is steady (annual change, in %)
More economic policy coordination?
To start with, let us refer in full to the paragraph in the introductory statement on public finances: Regarding public finance policies, the eurozone’s fiscal stance is expected to remain mildly expansionary in 2020, thus supporting economic activity. In view of the weakened economic outlook, the (council) welcomes the Eurogroup’s call for differentiated fiscal responses and its readiness to coordinate. Governments with fiscal room to manoeuvre should be ready to act in an effective and timely manner. In countries where public debt is high, governments need to pursue prudent policies and meet structural balance targets, thus creating the conditions for automatic stabilisers to operate freely. All countries should step up their efforts towards a more growth-friendly composition of public finances.
The message is clear, and it becomes even more so by linking the answer to a question. While recalling that central bank independence is critical and must be respected, Lagarde said, “I don't see anything wrong with policymakers actually agreeing that they're going to make the efforts that they can in order to reach their respective goals”.
As well as wisdom, pragmatism seems to be one of the owl’s attributes.
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