Three of the European Central Bank’s (ECB) top policy makers defended their monetary stimulus even as they acknowledged that the negative side effects must be watched closely.
President Christine Lagarde told the European Parliament in Strasbourg that she realises subzero interest rates and bond purchases can hurt savers and lead to overvalued asset prices such as real estate, but that governments should do more to boost the economy.
“The longer our accommodative measures remain in place, the greater the risk that side effects will become more pronounced,” she said. “When interest rates are low, fiscal policy can be highly effective: it can support euro area growth momentum, which in turn intensifies price pressures and even-
tually leads to higher rates.”
Executive Board member Isabel Schnabel used a speech in Karlsruhe, the German city that is hearing a legal battle over the ECB’s bond purchases, to argue against false narratives and an “aggression and a coarsening of the language.” In Berlin, Chief Economist Philip Lane said negative interest rates clearly work and are needed to revive inflation.
The comments hint at rising concern among policy makers over the failure to hit their inflation goal despite years of unconventional stimulus. Keen to bolster the ECB’s credibility,
Lagarde has launched a strategic review to assess its key challenges.
, in a process that will also hold listening events with the wider public.
Schnabel’s speech comes just weeks before Germany’s constitutional court rules on the legality of the ECB bond purchases that she now manages. The ECB is frequently vilified by the nation’s media and politicians, and Schnabel made a point-by-point rebuttal of the most-common complaints.
“Many of the narratives about monetary policy cannot withstand careful analysis,” she told an audience of legal scholars. “This is something that worries me — discussions are taking place in an atmosphere of rising aggression and a coarsening of the language.”
Unlike Federal Reserve Chairman Jerome Powell, who addressed U.S. lawmakers earlier on Tuesday, none of the speakers mentioned the coronavirus outbreak in their speeches, though Schnabel said in an interview with German newspaper Welt that the ECB is watching closely. She said the uncertainty is “enormous.”
The disease has become a pressing economic risk for central banks as it shuts factories and disrupts supply chains. Powell said he’s closely monitoring the potential for spillovers from China to the rest of the world, though stopped short of saying it had changed the Fed’s baseline outlook for the U.S. economy.
The euro-zone economy is struggling after a dismal fourth quarter in which factories remained mired in a manufacturing recession. While there are some signs that the worst of the economic slowdown is past, the coronavirus raises the prospect of more damage at a time when the ECB is running low on monetary ammunition.
Lagarde focused on reiterating longstanding ECB calls for fiscal support, structural reforms, a full banking union and a capital markets union.
“A more resilient economic and monetary union with these elements would not just help to protect our living standards from adverse domestic and global developments,” she said. “It would also support Europe’s influence in the world, including by making the euro more attractive worldwide.”
Her review will primarily consider whether the institution should change its inflation goal of “below, but close to, 2%,” but will also delve into non-core themes such as climate change and digitalization. Euro-area officials, speaking on condition of anonymity, have described a rushed agenda with staff starting on eight workstreams even before getting formal approval from the Governing Council.
Climate change and digitalization “will not wait for us to gear up and get ready,” Lagarde said in Strasbourg. “They will affect us whether we are ready or not.”