ECB needs policy review: Lagarde

FRANKFURT - The European Central Bank needs to keep policy loose for a long time but should carry out a broader review of policy that also takes into account global challenges like climate change, Christine Lagarde, the bank’s likely next president said.

Facing unprecedented shocks, the ECB was forced to reinvent its toolkit over the past decade and has now exhausted many of the unconventional measures at its disposal without lifting inflation back to its target of almost 2 percent.

Acknowledging that the world has changed since the ECB’s last review in 2003, Lagarde argued that like the Federal Reserve and the Bank of Canada, the ECB should also conduct a broader review.

“2003 was a long time ago and many things have changed as far as the ECB is concerned,” Lagarde told the European Parliament’s committee on economic affairs in a confirmation hearing.

“My strong belief is that the cost-benefit analysis (of policy) and possibly a review of the monetary framework, that would have to be conducted, not just by the ECB, but also in coordination with other central bank institutions from around the world, is warranted, given the circumstances,” she said.

While Lagarde’s appointment as ECB president from November is still to be confirmed, the process is largely a formality as euro zone leaders, who make the final call, appear united in their backing of her nomination.

Acknowledging that the ECB’s primary role was to maintain price stability, Lagarde went out of her way to emphasize the institution’s role in combating climate change.

“My personal view is that any institution has to actually have climate change risk and protection of the environment at the core of their understanding of their mission,” Lagarde said.

“Primary mandate is price stability, of course. But it has to be embedded that climate change and environmental risk are mission critical,” she added.

Lagarde largely avoided commentary on current policy but argued that a prolonged period of ultra-easy policy is necessary given global challenges, weak growth and uncomfortably low inflation.

She added, however, that the ECB should also be mindful of the negative side effects of unconventional measures.

FRANCOIS LENOIR/ REUTERS Christine Lagarde, the next president of the European Central Bank, speaks to the European Parliament’s Economic and Monetary Affairs Committee in Brussels, Belgium, Wednesday.