ECB'S Monetary Policy Strategy Review

At the first monetary policy meeting of the year, chaired by Christine Lagarde, the European Central Bank (ECB) did not change interest rates. In a press conference after the bank’s decision, President Christine Lagarde emphasized that the monetary policy strategy will be reviewed for the first time since 2003.

“As our economies are undergoing profound changes, it is the time for a strategy review to ensure we deliver on our mandate in the best interest of Europeans,” said ECB President. Then, the press release on ECB website reported that “Declining trend growth, on the back of slowing productivity and an aging population, as well as the legacy of the financial crisis, have driven interest rates down, reducing the scope for the ECB and other central banks to ease monetary policy by conventional instruments in the face of adverse cyclical developments.” The report also stated that the threat to environmental sustainability, rapid digitalization, globalization and evolving financial structures have further transformed the environment, where monetary policy operates. Hence, the Governing Council decided to start the review of the monetary policy strategy thorough analysis and open minds.

The Council’s strategy review, which is expected to be completed by the end of 2020, will include the quantitative formulation of price stability, together with the approaches and instruments by which price stability is achieved. According to the press release, Governing Council will review the effectiveness and the potential side effects of the monetary policy toolkit developed over the past decade and how the economic and monetary analyses should be updated, also in view of ongoing and new trends.

When we look at the reflections of the interest rate cut cycle that started with Mario Draghi’s appointment as ECB President in 2011 and the bond-buying programs that have been introduced within the process, we can say that the desired vitality in the Eurozone economy and inflation rates has not been achieved compared to the decisions taken. Taking into account these factors in the Eurozone, where traditional and non-traditional monetary policy instruments are insufficient, the European Council’s election of Christine Lagarde as the new ECB President was the first important decision to address this problem. However, although Lagarde is not as experienced in banking as Draghi, she is politically competent to have an effect on the countries within the Eurozone.

During this process, which is scheduled to be completed in late 2020, ECB members can assess the underlying problems and ask them to use financial policy tools more effectively against the troubles in their member countries. Due to Lagarde’s future effect on Eurozone countries, Draghi’s strategy of reducing the current troubles by spreading them equally to the member countries can be initiated at the end of the review process.


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