Christine Lagarde in favors of a policy to support the economy

We should not expect an economic revolution in the coming months at the European Central Bank. Christine Lagarde, its future president, spoke out in favor of maintaining the current monetary policy of supporting the euro area economy conducted by the institute for the “foreseeable future”. “It is clear that monetary policy needs to remain very accommodative for the foreseeable future,” she said in written responses to the European Parliament published on Thursday as part of the validation procedure for her appointment, adding that the ECB had not yet reached the “floor” of its interest rate policy.

While the measures taken by the Governing Council of the Institute, currently chaired by the Italian Mario Draghi, have at this stage removed the specter of deflation and supported growth and employment, “inflation (has) remained consistently below the ECB’s inflation target” in recent years, which is close to 2%, the current Managing Director of the IMF stresses. Also, “the economic expansion of the euro zone has slowed recently and growth prospects are declining”, she adds to justify the need for support measures. This is due to uncertainties related to geopolitical factors, protectionist pressures, and emerging market vulnerabilities,” she said.

Reassure Germany

In terms of the answer to be given, “I do not think the ECB has reached the bottom” of its interest rate policy, she considers, although it seems clear to her that “low rates have implications for the banking sector and financial stability in general”. This is a way of trying to reassure Germany and its banking sector, which regularly complains about the ECB’s very low-interest-rate policy, which in its view is responsible for heavy losses for savers. Critics in Germany of the ECB’s expansionary policy consider that it is mainly aimed at supporting countries in southern Europe in difficulty, such as Italy, but is not adapted to a country like Germany.

At the next meeting of the Frankfurt Institute on 12 September, the custodians of the euro could adopt a package of measures including a reduction in the deposit rate, with a mechanism to mitigate its impact on bank profitability, and a relaunch of the debt buyback program, which was shelved at the end of 2018. Christine Lagarde also expects Brexit to have a “limited impact” on access to financial sector services in the euro zone. According to her, the time ahead before November 1, the foreseeable date of Brexit, should “be used by financial and non-financial companies to continue to prepare for all possible contingencies”.