Central bank outsider Lagarde to chart new ECB course

Central bank outsider Lagarde to chart new ECB course

International Monetary Fund chief Christine Lagarde will become the first woman to the head the European Central Bank.
International Monetary Fund chief Christine Lagarde will become the first woman to the head the European Central Bank.

FRANKFURT: IMF chief Christine Lagarde may be the first woman to be nominated head of the European Central Bank, but her political background and lack of central bank experience raises important questions about the independence of monetary policy in today's highly uncertain times, analysts said.

A former corporate lawyer and French finance minister with a polished public image and confident command of English, the 63-year-old provides a sharp contrast to the long line-up of besuited male technocrats whom ECB watchers had all seen on the shortlist in recent months.

Taking over the ECB a decade after the global financial crisis, the International Monetary Fund director is expected to push on with the easy money policies and ultra-low rates that outgoing ECB chief Mario Draghi employed to stimulate the economy.

While Lagarde has stopped short of issuing recommendations to central bankers from her Washington seat, she "has always been supportive of the ECB's unconventional policies," said Frederik Ducrozet, a strategist at Pictet Wealth Management.

Since the financial crisis and subsequent sovereign debt battered the eurozone, the central bank has entered uncharted territory in its battle to coax inflation back towards its preferred goal of just below 2.0 percent.

Looking to boost the flow of credit through the economy to support activity and prices, it has set interest rates at historic lows and pumped 2.6 trillion euros ($2.9 trillion) into the financial system via its "quantitative easing" (QE) bond-buying scheme between 2015 and 2018.

Looking ahead, the eurozone is still suffering sluggish growth and inflation, meaning "in the absence of improvement... additional stimulus will be required," Draghi said last month.

That could mean Lagarde could quickly have to lower rates still further and relaunch QE purchases.

The ECB's massive interventions have not escaped controversy.

In Germany, conservative politicians and economists accused the central bank of printing money to prop up shaky eurozone members.

"The key thing about the appointment of Christine Lagarde... is that she is not Jens Weidmann," the Bundesbank (German central bank) governor who notoriously voted against QE, said Andrew Kenningham of Capital Economics.

"Lagarde has consistently supported monetary policy loosening in general and QE in particular," he added.

Her political background raises questions as central bankers increasingly come under pressure from politicians.

US President Donald Trump, for example, has not only put pressure on the head of the US Federal Reserve on interest rates, but last month accused Draghi of trying to manipulate the euro.

Michael Hewson, analyst at CMC Markets UK, called Lagarde "a controversial choice at a time when central bank independence is increasingly being questioned."

He noted that if her appointment is confirmed, there will be two ex-politicians at the top of the ECB -- the vice president, Luis de Guindos, previously served as Spain's economy minister.

This calls "into question the political impartiality of what is probably the most important position in Europe," Hewson said.

But Pictet's Ducrozet said that Lagarde "has frequently insisted on the importance of central bank independence".

Another question raised by the choice is the level of expertise needed to run a central bank.

With the departure of former chief economist Peter Praet and Draghi, the ECB's six-strong executive board is losing two PhDs in the field this year.

The change of the guard amounts to a "monetary policy brain drain", ING bank economist Carsten Brzeski said.

"Lagarde would probably be more of a moderator than an intellectual mastermind on monetary policy," he added -- potentially amplifying the role of the 19 national central bank governors who sit on the ECB's governing council.

Nevertheless, the president is backed up by a massive staff of experts and former Central Bank of Ireland head Philip Lane, who has stepped into Praet's shoes.

"A continuation of a pragmatic monetary policy stance, as well as a confirmation of 'whatever-it-takes' looks likely," Brzeski predicted, in a reference to Draghi's infamous pledge to take possibly radical measures to save the euro.

Other analysts also pointed out that a non-economist is running the US Federal Reserve on the other side of the Atlantic.

"(Jay) Powell is a lawyer as well, even if the difference is that he has been a Fed governor for a number of years," said Quincy Krosby, strategist at Prudential Financial.

As for Lagarde, the important thing is "she has proven herself during a difficult time globally, a global downturn, a synchronised recovery and now a global slowdown," she added.


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