The European Central Bank will next year review its tools and objectives in order to better fulfil its mandate of price stability, and it also intends to assess the appropriateness of issuing its own digital currency, in the face of growing concerns about Facebook’s Libra.
The ECB last conducted its strategic review back in 2003 and since then, the world economy has been transformed by the digital revolution. For some, the economic developments have impacted prices and central banks should therefore revisit their tools. In addition, climate change will further transform the ways nations produce and consume.
Christine Lagarde took the ECB reins in a critical period: the monetary decisions adopted by her predecessor, Mario Draghi, were questioned by an important group of central bank governors. The euro area economy continued to slow down. And a review of the ECB’s goals and its tools was long overdue to better achieve its mandate of price stability.
After chairing her first governing council on Thursday (12 December), Lagarde told reporters that the ECB will launch the strategic review next January, and will be concluded by the end of 2020.
She said this review will be “comprehensive” and the central bank will consult with other EU institutions, including the European Parliament, the academia and the civil society at large.
Lagarde explained that the “core” of the review will be how to better fulfil the mandate of price stability, in particular, the goal of an inflation rate of below, but close to 2% over the medium term.
“It will take its time, but not too much time”, she said.
To that end, the ECB will take stock of the “effectiveness” of the monetary instruments used in the past, “what results have delivered”, including interests rates, the bond-buying programme or the credit lines extended to banks (TLTRO).
Lagarde, however, did not clarify whether the bank would be ready to consider new instruments, like the so-called ‘helicopter money’ – providing cash directly to citizens.
There was “no preconceived landing zone at this time”, she said, although she told MEPs early this month that her institution will conduct the process with an “open mind”.
Lagarde confirmed that the strategic review will address the major changes of the last 16 years, including “the massive” technological transformation and the “immense challenge” that climate change represents.
It will review “each and every corner” of the business it conducts as a central bank to better deliver on the ECB mandate, she said.
In a parallel process, Lagarde announced that the ECB will also “accelerate” the work of the task force dedicated to exploring whether to launch a digital currency.
Last June, Facebook announced that it will launch Libra, a digital token, in 2020. The social media giant’s project was received with concern by G7 nations and the EU.
Meanwhile, some central banks including the ECB said that they would explore the feasibility of launching their own digital currencies.
Lagarde said that the institution will identify by the middle of 2020 whether the goal of the ECB’s potential digital currency should be to cut costs in payment services, improve financial inclusion at no cost, or “cut the middle man”. After that, the Frankfurt-based institution would explore the technicalities of it.
“My personal conviction is that given developments we see, not so much in bitcoin but in stablecoins projects… we’d better be ahead of the curve because there is clearly demand out there that we have to respond to,” she argued.
In regard to the monetary policy decisions, the governing council decided on Thursday to leave unchanged its key interest rates and did not change the instruments it has in place.
However, the ECB revised its growth and inflation forecasts.
Compared with September, the GDP growth was revised down slightly for 2020 to 1.1%, while the economy is seen growing by 1.4% in both 2021 and 2022.
As for the inflation, it was slightly raised to 1.1% for 2020, and mildly revised down to 1.4% for 2021, mainly driven by the expected future path of energy prices.
Lagarde said that risks still remain for the eurozone economy, including geopolitical tensions, trade disputes and volatility in emerging markets, but now they “have become somewhat less pronounced.”