Incoming European Central Bank (ECB) President Christine Lagarde offered a clear sign that she’s ready to follow Mario Draghi’s path and keep monetary policy ultra-loose to lift euro-area inflation.
In her first comprehensive comments on monetary policy since winning the job, she said the ECB has the tools to tackle a downturn and must be ready to use them if needed. The euro weakened slightly after the remarks were published.
Although Lagarde won’t take up the role until November, her remarks are timely. They come two weeks before the ECB’s next policy meeting, when the Governing Council is expected to kickstart another round of stimulus. Interest rate cuts are widely forecast, and some economists expect to see a relaunch of quantitative easing.
Lagarde will take up the mantle of ECB president at a time of renewed challenge for central bankers, with growth slowing and inflation subdued. At the same time, interest rates remain low and there are questions over what monetary policy makers have left in the tank to combat a more serious downturn.
That’s prompted many to say governments need to step in with fiscal stimulus to fill the gap.
Harvard University economist Lawrence Summers warned this month that central bankers may be losing their ability to control inflation.
In written answers to a European Parliament questionnaire, Lagarde acknowledged the difficult backdrop. She said the economy faces downside risks, inflation is subdued and it’s “therefore clear that monetary policy needs to remain highly accommodative for the foreseeable future.”
“The precise mix of instruments deployed will have to depend on the nature of the shocks affecting the outlook for inflation as well as on financial market conditions,” she wrote.
Lagarde also said she believes the ECB can cut interest rates further, even though its deposit rate is already at a record-low -0.4 percent.
But she noted that there could be side effects from keeping rates well below zero for too long. That suggests she’d support measures to mitigate side effects on banks, such as tiering.
“While I do not believe that the ECB has hit the effective lower bound on policy rates, it is clear that low rates have implications for the banking sector and financial stability more generally,” Lagarde said.
“So it will be essential to closely monitor whether adverse side effects may emerge in the future, the longer low interest rates are in place.” She said the ECB’s past actions have been have been “effective and successful.”
“The ECB has a broad tool kit at its disposal and must stand ready to act,” Lagarde said.
There was also a Brexit warning in her comments. She said that if the UK crashes out of the EU without a deal, that could lead to “substantial financial market volatility” and have an impact on euro area financial conditions.
UK Prime Minister Boris Johnson made a dramatic move to curb the ability of lawmakers to thwart a no-deal Brexit, announcing a plan to suspend parliament for almost five weeks ahead of Brexit.