FRANKFURT – Christine Lagarde is wasting no time in putting her stamp on the European Central Bank.
The bank's new president said at her first news conference Thursday that she will lead a top to bottom review of how the institution sets monetary policy, looking at everything from how it defines success in fighting inflation to whether it can play a role financing the fight against global warming.
The policy review will "turn each and every stone,” she said. She said the review would “take its time but not too much time," starting January and finishing by the end of 2020.
The ECB left unchanged the stimulus package that was decided under Draghi on Sept. 12. That put the focus on Lagarde and her plans on how to steer the powerful central bank whose decisions affect 342 million people in the 19 countries that use the euro as their currency.
She is well known on the world stage from her previous jobs as French finance minister and then head of the International Monetary Fund, where she was deeply involved in efforts to rescue Greece and other indebted countries during the eurozone debt crisis.
Those jobs, however, did not require her to give detailed views on the highly technical subject of monetary policy, where a misplaced word can jolt financial markets. She declined to fill in that blank extensively on Thursday, saying “”I'm neither a dove, nor a hawk" — financial jargon for stimulus supporters and opponents — and that “my ambition is to be an owl,” implying the wisdom associated with that particular bird.
She told journalists that she would have “my own style” in communicating with the financial community and not to compare her too much to her predecessors. She is the first woman to head the ECB and the fourth president since it was founded in 1998, following Wim Duisenberg, Jean-Claude Trichet and Draghi.
Lagarde managed to give noncommittal answers on several topics. She said, for instance, that the estimated 1.7% inflation rate at the end of 2022 was unsatisfactory, implying more stimulus, but also noted that growth should rise to near the eurozone's potential, which would imply stimulus is less likely.
Caution like that led economist Carsten Brzeski at bank ING Germany to say that “for ECB watchers and financial market participants... learning how to read Christine Lagarde will take some time.”
Among the topics for the review could be how the bank defines its mission to keep prices stable, given by the European Union. The ECB currently expresses that as keeping annual inflation below, but close to 2%. The 2% goal is aimed at giving the economy a margin of safety to ward off deflation, a crippling downward price spiral that hit Japan in the 1990s. Some inflation encourages spending and investment. It also makes it easier for indebted members of the eurozone to pay down debt and lower business costs.
Inflation has remained stubbornly below the goal for years following the Great Recession and eurozone financial crisis of 2010-2012. Lagarde said a review was overdue since the last one occurred in 2003.
The review would also look at what role the ECB could play in supporting financing for projects aimed at fighting climate change. The ECB has already bought some so-called green bonds, which finance projects aimed at reducing pollution and fighting global warming. It did not, however, buy them for environmental reasons but as part of its broad plan to purchase government and corporate bonds with the ultimate aim of easing credit conditions generally.
The European Commission has announced a “green deal” aimed at lowering the EU's greenhouse gas emissions. The ECB's mandate says it must pursue price stability first but once that is taken care of it can look at supporting the general economic policies of the European Union.
Lagarde said that recent economic indicators are weak overall but “point to some stabilizing in the slowdown of of economic growth.” The decision to keep interest rates low and unchanged followed a similar move this week by the U.S. Federal Reserve, where officials indicated they expect no change to rates through 2020.
Doubts have grown among some economists about how much good more central bank stimulus can do to support developed economies. At the Fed, officials think the neutral interest rate, at which the bank's policies neither stimulate nor restrain economic activity, may be lower than in the past.
At the ECB, officials enacted a stimulus package as recently as September, when they cut a key rate and launched a bond-buying program that pumps newly created money into the economy. Lagarde said that package would continue to support the economy with easier borrowing terms for companies. Draghi pushed the package through over objections from some members of the rate-setting council. That has given Lagarde a respite period that she can use to conduct the review.
The economy in the eurozone is a mixed bag at the moment. The U.S.-China trade dispute has held back its manufacturing sector. Consumer demand and service companies have done better and that has helped lower unemployment. The ECB sees the eurozone growing only a modest 1.1% next year.
In September, the bank cut the deposit rate to minus 0.5% from minus 0.4%. The rate is charged on excess cash left at the central bank overnight by commercial banks, so the negative rate is in effect a penalty that aims to push banks to lend the money to companies. The bank also started 20 billion euros ($22 billion) in monthly purchases of government and corporate bonds.