Lagarde’s challenges include managing dissent within the ECB over stimulus policy after a minority of governing council members openly criticised the stimulus package that was decided at Draghi’s next-to-last meeting. That job may be supported by Lagarde’s extensive political experience from serving as head of the International Monetary Fund and before that as French finance minister.
She has said the bank will pursue a review of how it defines its inflation goal and also look at whether the bank’s measures could support efforts to fight climate change. Currently, the bank defines its mission as having annual inflation of “below, but close to, 2 per cent.” One reason for the review is that the bank – like other central banks – has struggled to raise inflation to levels that are considered healthier for the economy despite massive stimulus involving pumping newly created money into the economy. Inflation was an annual 1 per cent in November. The eurozone economy grew only 0.2 per cent in the third quarter.
The ECB – like the US Federal Reserve and several other central banks around the world – has cut interest rates to combat economic weakness amid a trade dispute between the US and China that threatens to disrupt world supply chains. But some economists question to what extent more stimulus such as interest rate cuts can help the economy after a decade of low rates since the global financial crisis.
Lagarde, like Draghi, has urged European governments to spend more on initiatives that can boost economic growth, such as roads, bridges and high- speed internet networks. Neither has received much response, however.
The central bank on September 12 cut the rate on excess cash deposited with it by commercial banks overnight to minus 0.5 per cent. That unusual step amounts to a penalty pushing banks to lend money rather than let it pile up at the ECB.
The bank also started 20 billion euros ($32.6 billion) in bond purchases a month, a step that pushes newly created money into the banking system to ease credit to companies and promote economic activity. That move was publicly questioned by the heads of the Dutch, German and Austrian central banks, who are also members of the governing council.
Stimulus opponents argue that cheap credit and low rates hurt savers and support profligate governments. The ECB says the measures have helped companies put millions of people back to work and prevented worse trouble.