ECB review may see bank take firmer line on low inflation and climate change

Phil Thornton
Christine Lagarde's resignation will be effective on 12 September: AP/Jose Luis Magana

The European Central Bank has launched a strategic review that could see it use monetary policy to tackle the climate emergency. The bank also hinted that it may relax its focus on tackling high inflation as it deals with a combination of slowing productivity and an ageing population, as well as the legacy of the financial crisis.

“As our economies are undergoing profound changes, it is the time for a strategy review to ensure we deliver on our mandate in the best interest of Europeans," ECB president Christine Lagarde said on Thursday.

Interest rates in the eurozone have been close to zero for the past four years as inflation has stayed below the ECB’s 2 per cent target for almost all of the last nine years. Savers in countries such as Germany have grown angry at near-zero savings rates.

She said that for the first 10 years of the ECB’s life its goal was to fight high levels of inflation. “The financial crisis was the pivotal point at which eventually inflation was too low, so it’s been a reversal of the situation. It requires that we look at the strategy very carefully and how effective we can be.”

The process is expected to conclude by the end of 2020 and Lagarde declined to say if any decisions had been taken. “I would not include, exclude or anticipate how we are going to deliver it,” she said.

The review will be wide-ranging and include looks at the tools the ECB uses, its targets, how it communicates. “We have to look at the effectiveness of our monetary policy,” she said. But she added the bank would always be governed by its mandate to achieve price stability.

The idea that the ECB will adjust its policy to help fight climate change has been at the top of the agenda since Lagarde was appointed president late last year.

She acknowledged that the debate over the ECB’s role would be controversial and spark criticism. “Is there going to be mandate creep? Isn’t that going to be a distraction? Why should it be the role of central banks?” she gave as examples.

She insisted the greater danger was to do nothing. “Failing to try is already failing,” she said, adding that the ECB should consider every area where it could participate in an agenda shared by the European Commission and many eurozone leaders.

She insisted that the review would be open to alternative views from within the ECB’s governing council. “I’m not a despotic president of the governing council — all views are welcome,” she said.

Earlier the bank said that decided to keep its interest rates on hold, as had been expected. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and -0.50 per cent respectively.

Lagarde said that rates would stay at their historic inflation level until the bank saw inflation get a level “sufficiently” close to its 2 per cent target.