IThe European Central Bank (ECB) has given the go-ahead for the revision of the monetary policy strategy. It has been one of the major mammoth projects of the monetary watchdogs since the ECB was launched 20 years ago. The monetary policy strategy provides the framework for the decisions of the Governing Council. How much leeway the monetary authorities have for their interest rate policy depends on their design. Most recently, the ECB changed its strategy, which was once developed under its former chief economist Otmar Issing, in 2003.
“The world has changed since then. We have to take this into account and check whether we need to adjust our strategy, and if so, in what form, ”said ECB President Christine Lagarde, explaining the plans to analyze the effectiveness and side effects of the monetary policy toolbox.
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The aim is to develop a possible catalog of measures by the end of 2020. Among other things, the aim is to review the definition of price stability and refine the communication of the central bank. The central bank also wants to check whether its own goals should possibly be expanded. Financial stability, employment and environmental protection are being discussed.
“The threat to environmental sustainability, rapid digitalization, globalization and evolving financial structures have further changed the environment in which monetary policy operates, including the dynamics of inflation,” the ECB justifies the revision.
Critics fear arbitrariness in monetary policy
If these new goals come into play, the central bank could become even more American. The US Federal Reserve must now pursue two goals on an equal footing: price stability and full employment. In addition, the Fed has already become the unofficial guardian of financial market stability.
Lagarde had already announced when it started in November that it wanted to review the central bank’s strategy. No stone would be left unturned, she said at the time. It sounds like a threat to critics. They fear that the ECB may finally say goodbye to its Bundesbank legacy and that some arbitrariness may return to European monetary policy.
Because the more goals an institution is committed to, the more difficult it becomes to remain independent. Most recently, the ECB has put a lot of work into it. In addition to purely monetary policy, she is now also responsible for banking supervision and has also become a state savior in the financial and euro debt crisis – a role that she has not been able to get rid of to date, and which is reflected in the immense balance sheet total of 4.7 trillion euros reflects. The sum already corresponds to a good 40 percent of European economic output. Before the financial crisis and thus the expansion of tasks, values of less than 20 percent were the norm.
“Whatever the new strategy will look like, we believe it will involve greater flexibility. Unlike Lagarde, we only see an open-ended process to the extent that financial stability, sustainable government debt and the preservation of the euro are not endangered, ”comments Alexander Krüger, economist at Bankhaus Lampe. He fears that the revision will also serve the goal of strengthening the foundation of ultra-expansionary monetary policy. The current discussion on including climate protection in the ECB’s target catalog suited this. “We doubt that this would strengthen the ECB’s credibility,” says Krüger.
“I will not commit myself”
On Thursday, Lagarde also made it clear non-verbally that Lagarde is serious about her approach of bringing a breath of fresh air to the ECB. The new top euro keeper demonstratively wore a golden owl as a brooch on her lapel. It was the very animal that she had referred to in Solomon during her first press conference when a journalist asked if she felt more about the strict hawks or the loose monetary policy doves.
Lagarde followed the motto of not being determined ahead of time. When asked whether she would prefer a more symmetrical target or whether the ECB should in future set a certain range for the euro area inflation to be tolerated, she said: “I will not commit myself in advance. It would be unfair to anticipate the process. I have my opinion on this, but our goal is to collect suggestions and then make the best possible decision to fulfill our mandate of price stability. ”
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So far, the ECB has been pursuing its own goal of achieving an annual inflation rate of “below but close to two percent” in the medium term. However, the central bank has clearly fallen below this mark under Lagardes predecessor Mario Draghi in the past eight years.
Despite all efforts to get prices and the economy in the euro area going with the help of negative interest rates and multi-billion dollar bond purchases, inflation in the euro area is still far from the two percent target at 1.3 percent. According to the ECB projections, the average inflation rate could even drop to 1.1 percent this year. If inflation is too low, there is a risk of a deflationary downward spiral, which is why the monetary authorities are just as suspicious of it as they are of excessive inflation.
The goal of stable prices could be softened
Economists are therefore speculating that the ECB may have a broader target in the future. A so-called symmetrical target, in which central bankers could allow rates of over two percent for a certain period of time after a long phase with too low inflation values, is also a possible scenario.
However, critics complain that such a change could undermine the ECB’s goal of ensuring stable prices. The fear is that the central bank would also move further away from the former legacy of the Bundesbank, on the model of which it was once created.
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Lagarde was also asked whether she wanted to do away with the previous tradition of making decisions by consensus. So far, the unwritten law applies that the Governing Council does not vote in terms of monetary policy, but decides on measures by consensus.
Draghi, however, had ignored this on several occasions and, particularly in the final phase of his term in office, also pushed through measures against the resistance of council members. “I’m not a despotic president,” Lagarde replied with a friendly smile. All opinions are welcome, but the Council must also come to a decision at some point – even if that means not sometimes making a decision by consensus.
The Council is currently largely in agreement that the ultra-relaxed course in monetary policy will continue: it left the key interest rate at a record low of zero percent. Banks must continue to pay 0.5 percent interest when parking money with the ECB. In addition, the ECB plans to continue investing € 20 billion a month in bonds for an indefinite period.
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