Head of Macro Analysis
Summary: From 10.30 am today, Christine Lagarde will be heard by the European Parliament’s ECON Committee. We had read the 37 pages where she answers to written questions from MPs.
From 10.30 am today, Christine Lagarde will be heard by the European Parliament’s ECON Committee. We had read the 37 pages where she answers to written questions from MPs. You can have access to the document here.
We highlight below the main takeaways.
1/ On the evolution of monetary policy
She endorses unconventional tools, including the OMT programme and negative rates, as she has done it previously (Speech in 2013 at the Fed of Kansas City): “The easing measures deployed since June 2014, including targeted longer-term refinancing operations, negative rates, large-scale asset purchases and forward guidance, were successful in fending off the risks of deflation and redenomination at the height of the crisis”.
She also lets the door open to further easing, confirming by the way she will follow Draghi’s path: “Given the current inflation outlook, a highly accommodative stance of monetary policy will likely still be needed for some time”; “it remains appropriate for the ECB to provide an ample degree of monetary policy accommodation to support the expansion of the economy” and “at the current juncture, policy normalisation is premature”.
Interestingly, she has not discussed a tiering system, which causes divergence among the Governing Council according to the latest ECB minutes.
2/ On the ECB mandate
She carefully sticks to the ECB mandate and the inflation target of “below, but close to, 2%”. Asked about structural growth and ecological transition, she considers that the ECB has done its jobs and that monetary policy is not always the most effective tool to deal with such issues. But she timidly mentioned that the central bank needs to support “the general policies in the EU, such as sustainable and inclusive growth”. This does not represent a real change, but it confirms that the ECB mandate cannot be only devoted to price stability and financial stability.
3/ On ECB communication
“Communication has become a core tool of central bank policy”. Certainly. However, too much communication is not all good. In a recent speech “Can central banks talk too much?”, Hyun Song Shin, Adviser and Head of Research of the BIS, got an important point: the louder central banks talk, the less informative are market prices and the less they should read from them. This is key to understand by policymakers and market participant.
4/ On the role of the euro
What I certainly consider as the most interesting part was the mention of the role of the euro: “My ultimate premise is that the euro is a European public good that should continue to improve its international standing”. Unfortunately, she has not given yet more inputs on that key topic. There has been lately a lot of talks about ways to improve its international role and my understanding is that Lagarde could probably be the best policymakers to push in the right direction, due to her previous professional experience.
5/ On cryptocurrency
She keeps an open mind regarding cryptocurrency and she confirms the need for further regulation, which is broadly in line with the EU consensus: “The emerging stablecoin projects, of which Facebook’s Libra initiative is an example, are a private sector attempt to improve existing financial services and can bring benefits with respect to efficiency of cross-border payments and for financial inclusion”.
Conclusion: It was a rather uneventful Q&A. We should not forget that this is a very formal exercise with low policy implications. Thus, expectations were low. As we have previously stated, Lagarde’s first and main tasks will be to implement monetary policy decided by Draghi and unveiled on September 12th. In the long run, we still believe that she could positively surprise on more political topics, such as the role of the euro or maybe even on cryptocurrencies.