Intermoney | ECB President Christine Lagarde acknowledged yesterday that the central bank would consider formulas to allow inflation to exceed 2%, without being forced to raise rates and suffocate the recovery. She also added that from now on, the “extraordinary measures” of the monetary authority will have to be assumed as one more tool within normality: “Since 2009, it has been assumed that normalisation meant returning to the policy of using interest rates and eliminating unconventional policies (…). But if normality is similar to what we saw just before the pandemic, and I’m afraid that’s what we’re seeing now, we have to be prepared.” In other words, Lagarde was recognizing, indirectly, what has long been evident: managing the size of the ECB’s balance sheet has become its primary monetary policy tool.
Reality, as Lagarde indeed acknowledged, is in keeping with a world in which inflation targets must be transformed. They were designed to avoid upward deviations, but not to deal with prolonged situations of inflation deficit. In this regard, she introduced a very interesting concept, such as the need to achieve inflation goals more quickly. A point which reinforced the idea that there are still times of great generosity ahead on the part of the ECB.
The perception of a future of great generosity in the Eurozone’s monetary policy was also supported by the Governor of the Bank of France. In fact, it is worth taking time to consider the following words from Francois Villeroy: “Rethinking the second pillar and monitoring a broader set of variables, including financial institutions’ assets and nominal GDP, could help the ECB to verify and reconcile its secondary objectives, starting with financial stability, with its primary mandate of price stability.” In this sentence the key lies in what he calls the second pillar. It refers to the objectives of the ECB and, in particular, its responsability to contribute to the achievement of the EU’s goals. A nod which could suggest that the redefinition of the ECB’s strategy and objectives could go beyond inflation and move, in some way, towards a model more similar to that of the Federal Reserve. That said, we recognize we are reading too much into this sentence, as it would be a sensitive issue from a legal point of view.
The counterpoint to the previous messages came from Bundesbank President Jens Weidmann. He stressed that great attention should be paid to “how we interpret our mandate” since “the more we interpret our mandate, the greater the risk we will become entangled in politics and overload ourselves with too many tasks.” In addition, he warned of the risks of massive bond purchases by “blurring the line between monetary policy and fiscal policy,” although considering them a “legitimate and effective monetary policy tool.” In the end, Weidmann served to remind us that we should not just confine ourselves to the lax speeches coming from the ECB. At the end of the day, there is a group of orthodox countries represented by the institution and they will be in charge of putting limits on the generosity of monetary policy in the EMU.