The European Central Bank launched a broad review of its policy on Thursday that is likely to see new President Christine Lagarde redefine the ECB’s main goal and how to achieve it.
The euro zone’s central bank has fallen short of its inflation target of just under 2% for years, even after launching increasingly aggressive stimulus measures under Lagarde’s predecessor, Mario Draghi.
Lagarde said that aim will now be reviewed, along with the ECB’s toolkit, how it measures price growth and how it communicates with the public.
“We will not leave any stone unturned and how we measure inflation is clearly something we need to look at,” Lagarde told her second news conference as ECB president.
How the ECB changes its formulation of price stability — currently defined as an annual inflation rate below, but close to, 2% over the medium term — will be crucial to anticipate future policy moves.
The ECB could signal its commitment to boosting inflation by raising the goal to 2% and spelling out that it will take any undershooting just as seriously as an overshoot.
But hawks on the policymaking Governing Council, who have long called for the ECB’s money taps to be shut off, will not go down without a fight.
Some of them favour creating a tolerance band around 2%, which would reduce pressure on the ECB to act, while others would leave the target unchanged or even cut it.
Lagarde refrained from revealing her favoured option pending the end of the review, expected in November or December.
An analysis on how to better incorporate housing costs, which have been rising fast in Germany and other euro zone countries, is likely to take even longer, Lagarde added.
ECB rate-setters did not make any policy change on Thursday, simply standing by their pledge to keep buying bonds and, if needed, cut interest rates until price growth in the euro zone heads back to their goal.
They did, however, discuss the recent improvement in the economic outlook, which has seen data stabilise and the United States and China reach a trade deal.
Lagarde acknowledged that views differed on the Governing Council and welcomed the discussion, emphasising the diplomatic skills that her predecessor was often accused of lacking.
“I’m not a despotic president of the Governing Council,” Lagarde said. “All governors have their space and time in order to share their perspective and submit their views, but at the end of the day and at the end of the process, we still have to complete the introductory statement and release a monetary policy decision.”
The ECB is widely expected to leave its monetary policy on hold until the review is completed.
That would leave it adding 20 billion euros ($22.16 billion) worth of bonds to its 2.6 trillion euro portfolio every month and charging banks 0.5% on their idle cash for most of the year.
But Lagarde said the ECB would adhere to its current strategy until a new one is adopted, meaning policy changes could still take place in the meantime.
“We think the ECB will cut interest rates at the end of the year when the review concludes, in order to underline its commitment to meeting the inflation target,” said Paul Diggle, an economist at Aberdeen Standard Investments.
The euro fell against the U.S. dollar after Lagarde's news conference and was last down 0.4% at $1.1046.