MNI POLICY: Fiscal Agreement, ECB Policy Review Needed-Lagarde

By Luke Heighton

     FRANKFURT (MNI) - Christine Lagarde today called for greater coordination

between European fiscal authorities to stimulate the eurozone economy, and

committed herself to conducting an in-depth review of the European Central

Bank's monetary policy strategy.

     Lagarde, who appeared before the European Parliament's Econ Committee in

her capacity as ECB president-elect, said: "There is clearly cooperation to be

had if all the institutions in Europe, and the eurozone in particular, want to

respond to the threats of populism and nationalism."

     Among euro area governments, many "have the capacity to use the fiscal

space available to them ... it's a majority of countries in the euro area," she

continued.

     Lagarde said she agreed that a highly expansionary policy "is warranted for

a prolonged period of time," but she stressed that it was necessary to be

"mindful of negative and potential side effects of unconventional monetary

policy."

     Global low interest rates pose questions for central banks globally, not

just the ECB, Lagarde continued, adding that there is a need to reflect on

monetary policy frameworks.

     "This is a task I intend to embark upon," she said, "In consultation with

other central banks around the world."

     Asked what monetary tools the ECB has at its disposal, Lagarde admitted

there was a need for "new, innovative instruments," but gave no further details,

and insisted that she did not want to anticipate decisions the Governing Council

might take on Sept. 12.

     On the subject of the ECB's medium-term inflation target of close-to but

under 2%, Lagarde said: "The clarification of the aim is something that has been

a little bit explored."

     "What is the meaning of close to, but below 2 per cent ... are we talking

about 1.6 or 1.9 [per cent]? There is clearly flexibility in between."

     That objective, as with the future direction of monetary policy more

generally, and negative rates in particular, should be subject to a rigorous

cost-benefit analysis, Lagarde said, adding: "Any institution has to have

climate control risks at the core of its mission.

     "The ECB cannot exclusively invest its [EUR] 2.6 trillion on green bonds,"

but it can signal that it will look at that increasingly, she said, "and that's

a signal for the market."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$X$$$,MT$$$$,M$$EC$]