Central bank outsider Lagarde to chart new ECB course


IMF chief Christine Lagarde may be breaking ground as the first woman to be nominated as head the European Central Bank, but her political background and lack of central bank experience raise important questions about monetary policy independence in 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 contrasts sharply with the line-up of besuited male technocrats whom ECB watchers had all mooted as possible candidates in recent months. Taking over the ECB a decade after the global financial crisis, the International Monetary Fund director is expected to continue with the easy money policies and ultra-low rates that her predecessor Mario Draghi employed to stimulate the economy. While Lagarde steered clear of issuing recommendations to central bankers from her IMF chair, she "has always been supportive of the ECB's unconventional policies," said Frederik Ducrozet, a strategist at Pictet Wealth Management. The financial crisis and subsequent sovereign debt that battered the eurozone has forced the ECB into uncharted territory in its ongoing battle to coax inflation back towards its preferred goal of just below 2.0 percent. It has cut interest rates to 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. But only last month, Draghi warned that "in the absence of improvement... additional stimulus will be required," meaning Lagarde may have to cut rates still further and relaunch QE purchases rather soon. - Political crossfire - The ECB's unprecedented policy measures have not been without controversy. German politicans and economists regularly 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," said Andrew Kenningham of Capital Economics, referring to the head of the German central bank or Bundesbank, who notoriously voted against QE. "Lagarde has consistently supported monetary policy loosening in general and QE in particular," he added. Her political background is pertinent given the increasing pressure central bankers are coming under from politicians. US President Donald Trump, for example, has not only pressured the US Federal Reserve on interest rates, but last month accused Draghi of trying to manipulate the euro. Already, the ECB's vice president, Luis de Guindos, is a former Spanish economy minister. So the appointment of Lagarde as its chief calls "into question the political impartiality of what is probably the most important position in Europe," said Michael Hewson, analyst at CMC Markets UK. - 'Brain drain' - Another question raised is the level of expertise needed to run a central bank. Draghi, and the ECB's former chief economist Peter Praet, both held PhDs in central banking. So for ING bank economist, Carsten Brzeski, the change of the guard amounts to a "monetary policy brain drain". "Lagarde would probably be more of a moderator than an intellectual mastermind on monetary policy," he said. Nevertheless, the president is backed by a huge staff of experts and former Central Bank of Ireland head Philip Lane, who has stepped into Praet's shoes. OANDA analyst Edward Moya said Lagarde was expected to maintain Draghi's "expansive approach to both conventional and unconventional monetary policies." She "is not an economist, but she is a respected policymaker that has led the IMF through the aftermath of the financial crisis. She is considered an 'uber-dove', so it is very hard to imagine when interest rate hikes will be delivered by the ECB." Central bankers are described as "dovish" when they favour lower interest rates to boost growth. Other analysts also pointed out that a non-economist is running the US Federal Reserve on the other side of the Atlantic. Fed chief Jay Powell is a lawyer by training, "even if the difference is that he has been a Fed governor for a number of years," noted 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. burs-tgb/fz/spm/jh International Monetary Fund chief Christine Lagarde is on course to become the first woman to the head the European Central Bank ECB President Mario Draghi has steered the central bank into uncharted territory as a result of the financial crisis Lagarde's appointment also raises the question about the level of expertise needed to run a central bank