FRANKFURT, Germany (AP) - Mario Draghi took over as head of the European Central Bank eight years ago amid market speculation that the euro currency union might break up. Christine Lagarde succeeds him with more breathing room - but facing serious challenges from a weak economy, policy differences among her own officials, and questions about how much more central banks can do to help.
Analysts do not expect Lagarde to announce any changes in the bank’s interest rates and bond-purchase stimulus program when she holds her first rate-setting meeting and news conference on Thursday. The bank enacted a stimulus package in September to nudge the economy along in the face of headwinds like the U.S.-China trade conflict and Britain’s departure from the European Union.
It’s the first chance to hear how Lagarde communicates with markets and the public, a chief task for the head of an institution that affects the lives of 342 million people in the 19 countries that use the euro. That is not an easy task; the bank’s policy to keep one of its key interest rates below zero has come under criticism from Germany news media as penalizing savers, while any imprecise remark from Lagarde can set off big market movements.
Lagarde may “err on the side of caution and continuity” at first, said Frederik Ducrozet, senior European economist at Pictet Wealth Management. That would be a contrast to Draghi’s first meeting in 2011 when the bank cut interest rates during a debt crisis that threatened to break up the currency union.
Lagarde’s challenges include managing dissent within the ECB over stimulus policy after a minority of governing council members openly criticized 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%.” 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 1.0% in November. The eurozone economy grew only 0.2% in the third quarter.
The ECB - like the U.S. Federal Reserve and several other central banks around the world - has cut interest rates to combat economic weakness amid a trade dispute between the U.S. 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 Sept. 12 cut the rate on excess cash deposited with it by commercial banks overnight to minus 0.5%. 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 ($22 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.
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