October 16, 2019 / 4:57 PM / 2 months ago

ECB hawks demand revolution from new president Lagarde

FRANKFURT/NEW YORK (Reuters) - Two outspoken skeptics of the European Central Bank’s stimulus policy on Wednesday demanded a radical rethink of the ECB’s strategy under incoming President Christine Lagarde.

FILE PHOTO: The skyline, with the banking district and the European Central Bank (ECB) visible, is photographed in Frankfurt, Germany, August 13, 2019. REUTERS/Kai Pfaffenbach

The central bank governors of Austria, Robert Holzmannn, and the Netherlands, Klaas Knot, questioned the ECB’s revered inflation target of just under 2%, which has proven elusive for nearly a decade despite an ultra-easy policy under President Mario Draghi.

“I am fundamentally questioning the paradigm”, Holzmann told German business daily Handelsblatt. “I urge a review to determine whether the current position is right.”

He was speaking a week before the last Governing Council meeting of Draghi’s eight-year term as ECB President, which has been largely defined by a 2.6 trillion euro bond-buying program and other aggressive measures to boost inflation and keep the euro zone from falling apart.

Holzmann questioned the validity of these efforts and said the chances were high that the inflation target could be modified under Lagarde, who will take over on Nov 1.

Speaking in New York earlier, Knot said the ECB should define a range around its inflation target and give itself more time to achieve it so as to leave itself some wiggle-room when setting policy.

“One way to achieve this would be the introduction of a symmetric band around the inflation aim, which would buy the central bank time and flexibility in responding to forces it cannot control,” Knot said.

Bundesbank President Jens Weidmann also weighed in on the debate, dismissing suggestions that the ECB should broaden its remit to include goals other than inflation, such as unemployment, as the U.S. Federal Reserve does. [L5N271571]

He argued this would jeopardise its independence from governments.

“If the mandate were interpreted broadly, independence would be called into question sooner or later, and rightly so,” Weidmann told an audience in New York.

Knot, Holzmann and Weidmann were in a group comprising just over a third of the 25 members of the ECB’s Governing Council who opposed a decision to resume bond purchases at the last meeting.

The unprecedented spat culminated in the resignation of Germany’s appointee to the ECB’s board, Sabine Lautenschlaeger, late last month.

The ECB’s chief economist Philip Lane was a lone voice defending bank’s actions on Wednesday, saying Frankfurt would need to see inflation accelerating with momentum before dialing back its stimulus measures.

Lane, Knot and Weidmann were in the United States for the International Monetary Fund’s annual meetings, which take place against the backdrop of a slowing global economy and tense trade negotiations between the United States and China.

Reporting by Francesco Canepa and Balazs Koranyi; Additional reporting by Tassilo Hummel; Editing by Paul Carrel and Hugh Lawson

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