What to expect from Christine Lagarde’s monetary policy strategy review

On January 23th, 2020, Christine Lagarde, Mario Draghi’s successor as President of the European Central Bank, announced that the ECB Governing Council is going to launch a review of its monetary policy strategy. A similar measure has been taken in the past; in 2003 the annual inflation target was raised from a range between zero and 2 percent to the current “below, but close to, 2 percent”.

The reasons why this review has been announced are that, since 2003, the euro area, and the world economy in general, has seen structural changes that make it more difficult for the central bank’s tools to successfully pursue its price stability mandate. In particular, slowing productivity and the ageing population in Europe, which have caused growth trends to decline, combined with the 2008 financial crisis have driven interest rates down, even below the nominal zero lower bound. They have made it necessary for central banks around the globe to adopt unconventional monetary instruments to stimulate GDP growth and to raise inflation, which remains under the desired target.

Indeed, during the years as President of the ECB, Mario Draghi was able to avoid a sovereign debt crisis, but failed to prop up inflation – which has proven much more challenging. Hence the need to review the quantitative formulation of price stability, as well as the (conventional and unconventional) instruments employed until now to reach this objective. In addition to negative interest rates, forward guidance, quantitative easing and communication practices, the ECB aims to include climate change and environmental sustainability among priority considerations in the review process.

Inflation target

From the following graph, which illustrates annual inflation trends in the eurozone, we see that in the eight years of Draghi’s presidency, inflation averaged just 1.3 percent.