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ECB, Fed: Central banks redefine their strategies

2/11/2020

The European Central Bank, like the Federal Reserve in the US a few months ago, has officially launched its own strategy review at the 23 January monetary policy meeting. This is an ambitious plan. The communication in the months ahead will provide us further details regarding the goal of the review and what changes will take place.

TRANSCRIPT // ECB, Fed: Central banks redefine their strategies : February 2020

FOCUS

François Doux: Day after day, the economic and monetary environment is changing. Inflation is low, but there are still wage pressures. Monetary policy is also very accommodative. How do the central banks see all this? How might they react?

Louis Boisset, hello.

Louis Boisset: Hello François.

François Doux: The central banks are in the midst of strategy reviews. What does this entail?

Louis Boisset: They are overhauling, at least in part, their monetary policy tools and targets. The central banks are trying to adapt their policies to meet new international challenges at the macroeconomic level.

François Doux: Why now? Have the stakes changed?

Louis Boisset: The last strategy review by the European Central Bank (ECB) took place fifteen years ago, in 2003. A lot has happened in the meantime, so it is necessary to conduct another review. Why? Because growth is lower today due to probably the slowing in productivity gains.

The environment is also marked by lower inflation and interest rates. In particular, the natural interest rate – the theoretical real interest rate at which inflation rate neither rises nor falls – is also lower. This significantly constrains the impact of monetary policy action. It means there is less room of manoeuvre in case of an economic downturn.

François Doux: The ECB is following the lead of other central banks.

Louis Boisset: Exactly. The Fed, for example, launched its own strategy review in mid-2019. Other central banks in the advanced countries are also conducting reviews. The Bank of Canada, for example, regularly reviews its inflation targets.

François Doux: What will the ECB’s strategy review entail?

Louis Boisset: For the moment, we have relatively few tangible factors to go by. The ECB’s new president, Christine Lagarde, is leaving time for discussions not only within the Governing Council, but also with parts of civil society, which is new. The main focus is likely to be on the ECB’s mandate of price stability. Revisiting ECB communication tools will probably be discussed as well. Other subjects will be given secondary importance, including the fight against climate change, in which the ECB would like to play a greater role.

François Doux: Concerning price stability targets, the Fed seems to be doing the same thing.

Louis Boisset: Yes, they’re fairly similar. Based on recent statements, Fed members will be spending a lot of time discussing targets. The Fed has a dual mandate that targets both price stability and employment maximisation. The ECB’s review may be slightly more ambitious. The president and the Governing Council are likely to cover a few more subjects, notably structural ones.

François Doux: Yet what can we expect from the ECB’s strategy review? Maybe it is too ambitious to have concrete results?

Louis Boisset: That is a question worth asking, especially since certain subjects risk creating discord within the ECB’s Governing Council. Signs of dissension have already be seen in late 2019. Fighting climate change, in particular. Is it up to monetary policy or fiscal policy to tackle climate change? This is a very gripping issue that might trip up the ECB president in the months ahead.

François Doux:

Lots of ambitions and calling things into question. In any case, we are bound to see some passionate debates in Frankfort and elsewhere in the months ahead. Thank you, Louis Boisset. We will be back in a moment with William De Vijlder to talk about the eurozone economy.

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