ECB prepares for split over implementation of new strategy, warns Lagarde

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The European Central Bank’s unity on its new inflation target could dissolve as early as next week when policymakers meet to discuss changing its guidance on raising interest rates, its president Christine has warned. The guard.

The bank’s rate-setters are due to meet next Thursday for their first discussion since they launched a unanimously agreed New strategy, which changes the way the bank sets its monetary policy for the first time since 2003.

Lagarde announced the consensus deal, which included a new inflation target of 2% and increased tolerance for temporary moves above that level.

But, speaking on Sunday, she told the Financial Times: “I don’t have the illusion that every six weeks [at monetary policy meetings] we will have unanimous consent and universal acceptance because there will be variations, slightly different positions. And it’s good.”

The decision as to when to start scaling back the ECB’s pandemic stimulus package will be a crucial test of the bank’s new strategy in the months to come. Many analysts expect an announcement as early as September.

Since the start of the pandemic, the ECB has launched a € 1.85 billion emergency bond purchase program and has loaned billions more to banks at deeply negative rates.

Some members of the board of directors have already called to start reducing that stimulus after inflation hit the ECB’s new 2% target earlier this year, although price growth has slowed slightly since.

The President of the ECB has indicated that she anticipates the battles to come. “I have neither the expectation nor the illusion that we will be unanimous on all the decisions we make,” she said, adding that she expected “a constant effort” every time the ECB meets to define policy.

“What we will need to do now is redefine our forecast to align it with the revised strategy,” said Lagarde, stressing the importance of incorporating the new requirement that its monetary policy be “particularly aggressive. or persistent “when interest rates are close. at their lower limit, as is currently the case.

But Lagarde has indicated that she is likely to resist an early tightening of current policy, which economists see as the most aggressive stimulus in central bank history. She said “persistent” and “persistent” were “key words” that policymakers should not “undermine or underestimate”.

After failing for much of the past decade to bring inflation to its “near, but below 2%” target from the ECB last week replaced it with what Lagarde described as a more “simple, solid and symmetrical” lens. The central bank also said its new strategy could involve “a transitional period in which inflation is moderately above target” before reacting.

“Faced with the opposition [economic] shock, you have this particularly powerful [policy] reaction because you don’t want to be trapped, ”Lagarde said. She added that when interest rates are near their lowest limit “you have to be in the game even longer, which is why you say ‘persistent’.”

The last time the ECB hiked rates was in 2011, just as the eurozone sovereign debt crisis erupted, which is now widely viewed as a mistake. Most analysts don’t expect it to raise its policy rate to a record low of minus 0.5% before 2024 – at least a year later than the US Federal Reserve. is predicted to start increasing its rate.

Describing the strategy as a “basic document,” Lagarde said that would not make the ECB more accommodating. Instead, she said it gave policymakers additional flexibility to tolerate inflation temporarily above or below its target.

Lagarde said the review looked at potential new tools such as the direct distribution of “helicopter money”To citizens and expanding its asset purchases to stocks or bank bonds, without deciding the likelihood of the ECB using them.

“We’ve looked at the whole range of anything you can think of,” Lagarde said. “It was part of the intellectual exercise of looking at the whole realm of possibility. But it didn’t go further than that.

After a series of events to gauge public opinion on his policy, Lagarde said he had heard “loud and clear” that the two main concerns were climate change and the cost of housing. The exam covered both.

The ECB plans to adapt its modeling, banking supervision, purchases of corporate assets and its collateral policy to take climate risks into account. Lagarde said these would both address the financial risks of global warming and act as “a catalytic force” to help meet the EU’s green policy goals.

It will also seek to incorporate the costs of buying and owning a home into the alternative measures of inflation it uses, and ask the EU’s statistics branch to make a similar change to the official harmonized index of consumer prices.

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