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ECB needs policy review, should boost focus on climate change, Lagarde says

Key Points
  • Lagarde's appointment as ECB president from November is still to be confirmed.
  • But, the process is largely a formality as euro zone leaders, who make the final call, appear united in their backing of her nomination.
  • Acknowledging that the ECB's primary role was to maintain price stability, Lagarde went out of her way to emphasize the institution's role in combating climate change.
French President-designate of the European Central Bank (ECB) Christine Lagarde reacts during a meeting prior's to attend a European Parliament's Committee on Economic Affairs at the EU Parliament, in Brussels, on September 4, 2019.
JOHN THYS | AFP | Getty Images

The European Central Bank (ECB) needs to keep policy loose for a long time but should carry out a broader review of policy that also takes into account global challenges like climate change, Christine Lagarde, the bank's likely next president said.

Facing unprecedented shocks, the ECB was forced to reinvent its toolkit over the past decade and has now exhausted many of the unconventional measures at its disposal without lifting inflation back to its target of almost 2%.

Acknowledging that the world has changed since the ECB's last review in 2003, Lagarde argued that like the Federal Reserve and the Bank of Canada, the ECB should also conduct a broader review.

"2003 was a long time ago and many things have changed as far as the ECB is concerned," Lagarde told the European Parliament's committee on economic affairs in a confirmation hearing.

"My strong belief is that the cost-benefit analysis (of policy) and possibly a review of the monetary framework, that would have to be conducted, not just by the ECB, but also in coordination with other central bank institutions from around the world, is warranted, given the circumstances," she said.

While Lagarde's appointment as ECB president from November is still to be confirmed, the process is largely a formality as euro zone leaders, who make the final call, appear united in their backing of her nomination.

Acknowledging that the ECB's primary role was to maintain price stability, Lagarde went out of her way to emphasize the institution's role in combating climate change.

"My personal view is that any institution has to actually have climate change risk and protection of the environment at the core of their understanding of their mission," Lagarde said.

"Primary mandate is price stability, of course. But it has to be embedded that climate change and environmental risk are mission critical," she added.

Fresh stimulus

Lagarde largely avoided commentary on current policy but argued that a prolonged period of ultra-easy policy is necessary given global challenges, weak growth and uncomfortably low inflation.

She added, however, that the ECB should also be mindful of the negative side effects of unconventional measures.

She also appeared to support the ECB's interpretation that its inflation target is symmetrical, which would mean that after a period of undershooting the target, it could accept a period of overshooting.

With growth slowing and inflation undershooting the ECB's target for years, the bank has all but promised fresh stimulus when policymakers meet on Sept. 12, one of the last measures ECB chief Mario Draghi can take before stepping down on Oct 31.

As part of its package, the ECB is expected to cut rates deeper into negative territory, make a fresh promise to keep rates low for longer and compensate banks for the side effects of negative rates.

While analysts are also convinced that the ECB will restart asset purchases, but skepticism or outright opposition from several key euro zone members like Germany, France and the Netherlands, makes this discussion more complicated.