The world of monetary policy, according to Christine Lagarde


Governments hoping their nominee for European Central Bank president will keep a steady hand on euro-zone monetary policy can probably take heart from Christine Lagarde’s public views.

Lagarde, a lawyer and former politician rather than an economist, has frequently commented on central-banking issues since becoming head of the International Monetary Fund in 2011. AsCentral guardian of the world’s second-biggest currency area from Nov. 1, giving press conferences after each ECB policy meeting, her opinions will be key even if she leans on colleagues such as Philip Lane to craft detailed plans.

For the European Union leaders who nominated her, a smooth transition from Mario Draghi is key — Portuguese Prime Minister Antonio Costa said that “we have someone who gives guarantees that they won’t constitute a rupture” with the current president’s strategy.

Here is a selection of what Lagarde has said about the central bank’s actions and challenges:

Outright Monetary Transactions

Draghi’s flagship tool for fighting the euro-zone debt crisis has never been used but it’s still critical that the incoming chief backs it. Bundesbank President Jens Weidmann’s opposition to the bond-buying program known as OMT may have scuttled his own shot at the top job. Lagarde was in the audience when Draghi pledged in 2012 to do “whatever it takes” to save the euro, and spoke in favor of OMT after the program was announced weeks later.

“Many of the right decisions have been taken. Most recently, initiatives by major central banks — the European Central Bank’s OMT bond-purchasing program, QE3 by the U.S. Federal Reserve, the Bank of Japan’s expanded Asset Purchase Program — are big policy signals in the right direction.” — Sept. 24, 2012, Washington DC

Negative Interest Rates

Shortly after the BOJ followed the ECB in adopting a negative interest rate in 2016, Lagarde praised the tool while saying more time is needed to assess its side effects. That’s an issue on the Governing Council’s agenda now as officials consider whether to cut rates further and keep them below zero for longer.

While banks complain that negative rates — effectively a charge on their overnight reserves — hurt profitability, the ECB says that’s outweighed by the boost to the economy. Lagarde thought so as well.

“If we had not had those negative rates, we would be in a much worse place today, with inflation probably lower than where it is, with growth probably lower than where we have it.” — March 18, 2016, Ho Chi Minh City

Quantitative Easing

Draghi had to fight hard against skeptics both outside and within the ECB’s Governing Council to launch his broad-based asset-purchase program. He finally announced it in January 2015, as the euro zone was teetering on the edge of deflation. Lagarde responded the same day.

“We welcome the measures announced today that will strongly reinforce the ECB’s accommodative stance. The planned expansion of the ECB’s balance sheet will help lower borrowing cost across the euro area, raise inflation expectations and reduce the risk of a protracted period of low inflation.” — Jan. 22, 2015, IMF statement

Fiscal Support

Lagarde has demonstrated realism when it comes to central banks’ ability to counter the next downturn, backing the ECB’s repeated calls for governments to offer more support with better fiscal policies. She has urged nations to strike a better balance between growth, debt sustainability and social objectives.

“Monetary policy should remain accommodative where inflation is below target, and should anchor expectations…. The reality is that many economies are not resilient enough. High public debt and low interest rates have left limited room to act when the next downturn comes, which inevitably it will. For many countries, this implies making smarter use of fiscal policy.” — April 2, 2019, Washington

European Reforms

Draghi and his colleagues have also spent years urging governments to pursue structural reforms to bolster their economies, cries that have intensified as populist movements challenge European cohesion. Lagarde is on board with that as well, advocating flexible hiring practices, modernizing and harmonizing insolvency regimes, and spending more on innovation.

“Our goal should be clear: Restarting convergence and ensuring the fruits of economic growth are shared broadly across the EU. This will help restore faith in the European project.” — Feb. 14, 2019, Munich

Fresh Stimulus

The ECB and the Federal Reserve are expected to ease their monetary stances as soon as this summer in response to a global economic slowdown amid risks including U.S.-driven trade protectionism and Brexit. For that strategy, Lagarde has delivered praise, while again reminding governments that central bankers can’t do it alone.

“These policy responses have provided vital support over the past few months.… When the next downturn comes, which inevitably it will, policy makers may need to use all policy tools to maximize their combined effect. This means supporting demand through decisive monetary easing and fiscal stimulus wherever possible.” — June 5, 2019, IMF blog

Radical Theory

Finally, Lagarde has dipped into a topic that tends to make central bankers shudder — Modern Monetary Theory. Typically advocated as an argument for governments to worry less about budget deficits and use fiscal firepower to achieve full employment, monetary officials see it as poison to their independence. While Lagarde said MMT is no panacea, she didn’t reject it outright.

“While it is tempting, when you look at the sort of mathematical modelling of it, and it seems to stand, there are big caveats about it, such as if the country is in a liquidity trap, such as if there is deflation. Well then, in those circumstances, it could possibly work for a short period of time probably, because interest rates stay low until such time when they start going up. And then it is a bit of a trap.” — April 11, 2019, IMF press conference

Source: Financial Post

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