Christine Lagarde passed her first serious test as president of the European Central Bank on Thursday. After chairing the central bank’s governing council, she signalled continuity with the loose monetary policies designed by her predecessor Mario Draghi. But she also indicated that she would stick to her own style of communicating with markets, and confirmed that a “strategic review” of the bank’s mission and policy would take place throughout the course of next year.
Markets and the media had been eagerly expecting Lagarde’s first press conference, a ritual ECB exercise. A lawyer by training, she is, as she acknowledged recently, “still learning central banking.” A former managing director of the International Monetary Fund, she showed Thursday that she has already been a quick learner of the basics.
Foreign exchange traders who sent the euro EURUSD, -0.0988% slightly up after she talked may have been focused her indication that the economic headwinds the eurozone is currently facing – from trade war threats to the slowdown of emerging economies – seem “somewhat less pronounced.” But for the time being, the ECB is staying the course.
Lagarde’s opening statement sounded like a cut-and-paste from Draghi’s similar statements in previous months, notably after the ECB decided in September to lower its key interest rate to minus 0.5% and relaunch its bond-buying program, known as quantitative easing, to the tune of €20 billion a month. The new ECB president confirmed that monetary policy would remain “highly accommodative” for a “prolonged” period of time.
There are reasons for that. In spite of the massive monetary loosening initiated by Draghi in 2012, the ECB has failed to meet its official inflation target of “below but close to 2%” every year since 2014. The central bank now sees inflation slowly picking up in the years ahead but even the level it would reach in 2022, 1.6%, would hardly qualify as mission accomplished. Gilles Moec, the chief economist of insurance giant AXA, tweeted that “This would normally call the question: has enough accommodation been provided…”
Lagarde reiterated that she didn’t want to take sides in the battle between the ECB’s “doves” — advocates of Draghi’s policy— and the “hawks” who have been calling for years for a return of monetary policy to stricter norms. “I am an owl”, she said in a metaphor she has already over-used. It is unclear what she means by that, except that she intends to bring some civility to the deliberations of a feuding governing council whose differences were exacerbated by Draghi’s imperial style.
The modest, studious approach Lagarde takes to her job will go some way toward bringing peace to the ECB’s debates, as could the strategic review next year which, she said, will “leave no stone unturned.”
Paul Volcker, the just-deceased former Federal Reserve chairman, thought that non-crisis times are moments when central bankers must establish their credibility because in a crisis it is “the only asset” they have, economist Austin Goolsbee tweeted this week.
Lagarde is clearly building up her credibility. But she might have to drop the consensual style if another severe crisis hits the eurozone.