The European Central Bank’s new president Christine Lagarde on Thursday announced that the Frankfurt institute would begin a year-long “strategic review” in January, its first since 2003.
Here is how the ECB’s strategy has developed over the years and what prompted the decision to reassess it.
What is the ECB strategy now?
The ECB’s overriding mandate is to ensure price stability.
In 2003, its main decision-making body, the governing council, defined that goal as an inflation rate of “just below, but close to” two percent, a level that would encourage investment and employment, while warding off deflation.
But inflation has remained stubbornly low at around one percent despite years of easy-money policies, a phenomenon that has left many economists around the world scratching their heads.
Different theories have been put forward as to a possible explanation, from the rise of the casual “gig” economy to political shocks such as trade tensions and Brexit.
Critics of the bank’s ultra-loose monetary policies meanwhile have long argued that its record-low — and even negative — interest rates, as well as its massive “quantitative easing” bond-buying programme, are detrimental to savers and help accentuate asset price bubbles.
The review will be “an ideal opportunity for Christine Lagarde to reflect on the unconventional crisis measures adopted over the past decade,” Pictet Wealth Management strategist Frederik Ducrozet said.
At her press conference Thursday, Lagarde said discussions about whether the central bank should tweak the inflation target and change the way it calculates price growth would be at the “core and centre” of the review.
She even explicitly mentioned the possibility of including housing costs in the calculations.
A change in the inflation target to “around” two percent instead of “just below”, would be “desirable and plausible, if only to make forecasts simpler and more credible,” Ducrozet said.
Lagarde said the upcoming review would also “include the immense challenge that climate change is addressing to each and every one of us”.
The promise comes as the ECB faces intense pressure from environmentalists and lobbyists to green both its own operations and its investments in the wider economy through its bond-buying scheme.
Lagarde acknowledged this month that “the ECB’s mandate is not climate change”, but said climate risks could be built into its economic forecasting and other aspects of its work, such as banking supervision, without compromising the price stability target.
The planned review would also look at the impact of “massive technological changes” in recent years and rising inequality, she added.
While Lagarde did not raise it on Thursday, she has in the past suggested that the way the ECB communicates with the outside world could be improved.
Until now, ECB meetings have been shrouded in more secrecy than those of other central banks, with an “account” published only weeks later that neither names participants, nor reveals the voting record of individual governing council members.
“We think the bank may move to a more transparent and systematic process of voting on major policy decisions,” said Capital Economics analyst Andrew Kenningham.
The debate has been given fresh urgency following the decision by the ECB’s governing council in September to restart a monthly asset-purchasing scheme, which led to a rare public row where dissenters aired their grievances in the media.
Lagarde has also vowed to ditch some of the bank’s notorious jargon where a single word can move markets, but remain incomprehensible to outsiders.
Lagarde has said she wants to “dust off” the bank’s language to help citizens understand “what the ECB is for”.