Transcript of Governor Gabriel Makhlouf’s interview with Johanna Treeck, Politico

Interview with Governor Makhlouf conducted on 9 July 2021

Johanna Treeck: How does the ECB’s new strategy change its reaction function?

Gabriel Makhlouf: Let me take a step back because I think it is worth recognizing what this review was actually about. It was about taking stock of the extraordinary amount of change that's happened in not just the European economy but the global economy since we've done the last review. We did the last review before smartphones had arrived, so a lot has happened. We should never have allowed, we should never allow such a long time to pass without looking at the strategy.

For me there are five things that I would say have come out of this review. In reverse hierarchy, I'd say, committing to doing another review in 2025 is actually an important thing because we have recognized that you've got to look at the appropriateness of overarching policy. We're not going to wait for 20 years until the next one and that's important.

I also think what we've said about wanting to improve our communications is important. It is important that the public understands what we're doing and why we're doing it. We ultimately want them to have trust in the institution and its decisions but for it to have that trust it needs to have an understanding.  Making a determined attempt at layering up our communication so that both the markets understand it, but also the public understands is an important change.

The other final three things that are all of equal weight for me in terms of hierarchy. Firstly, the 2% symmetric target is important. You will find there are people who will say this is what they've been doing anyway so it's no change. And others will say well this is a pretty dramatic increase in the inflation target. I think this is an important clarification. Because the reality is that the below but close to has become something that was interpreted a bit differently by the markets. I think it was important that we brought clarity and a much greater degree of certainty to it so as to help anchor expectations clearly.

The other important change is our decision that we want to include the cost of owner-occupied housing in the measure HICP. I think it's important that the public's view of inflation coincides with the ECB view of inflation, and vice versa. And the reality is that for the public the cost of owner-occupied housing has become a significant element of consumption basket. In the end it's actually up to the independent statisticians to decide whether to do that but we hope they will. We recognize it will take time because we want to include the consumption costs, as opposed to the investment costs so that will be technically a challenge to do.

My fifth important outcome is the climate change action plan, which recognizes that the central bank does have an important role to play. Because when we play such an important role in economic activity, we can influence and support the general move to net zero. I suspect 20 years ago people may have debated a 2% symmetric target and arrived at below but close to. I suspect they did not debate climate change at all. So, that's pretty significant.

Johanna Treeck: You are not mentioning what everyone was looking out for ahead of the decision and that is the issue of tolerating inflation overshooting target?

Gabriel Makhlouf: No, it's not on my list of top five because, because for me what we've agreed is a 2% symmetric target. Bloomberg before the announcement was saying we had agreed to overshoot it, which of course is wrong. We have not agreed to overshooting. We're not doing what the Fed is doing, we are not doing average inflation targeting. We're not doing makeup strategies. What we are recognizing is, especially when you're operating at the lower bound, that the sort of action you may take may lead to transitory overshooting. We use the word transitory which is even less than the word temporary, it's almost incidental.

We had a good discussion about this. Some of my colleagues were already on the public record saying that they liked what the Fed had done, or a version of it. I was never persuaded that the Fed’s approach would work for us. I put more value in clarity and simplicity to anchor inflation expectations. I don't think the Fed had managed to do that. Secondly, the Fed also have got a different mandate.

Johanna Treeck: Can we go back to the question on the reaction function?

Gabriel Makhlouf: How's it going to change our reaction function? The simple answer to that is wait and see at our next meeting. We've kept the strategy review and our regular monetary policy conversation for separate discussions.

I don't think we're going to see a lot of significant change quickly, because the dominating theme at the moment is the pandemic. When I reflect back the last four weeks and the policy meeting in June, we didn't spend a lot of time talking about the Delta variant. I suspect in two weeks’ time the discussion will be a bit different, because the Delta variant is beginning to dominate, and it is starting to reflect in the data. I think over the next few months that's going to continue to be the focus of discussion so I think what we announced yesterday is not going to lead to dramatic change in the near term.

Johanna Treeck: Some of your colleagues wanted to link the review with an adjustment of the forward guidance to say that the APP should continue at least until December 2023 and that decision on interest rates should be decoupled from that on asset purchases. Do you think the new strategy warrants a new forward guidance?

Gabriel Makhlouf: I wouldn't be surprised if there was no change to the forward guidance, nor would I be surprised if there was some change to the forward guidance. I would not be comfortable with what you just described on APP. I'm not sure that limiting ourselves to a specific timescale is helpful. I think we need to have flexibility and certainly in the world we're living in, the more flexibility we're going to have, the better.

I think this is a discussion that we're going to have. The reality is we spent some time talking about it, but nowhere near enough time.

Johanna Treeck: How did you arrive at a 5-year cycle for strategy reviews? President Christine Lagarde had expressed a preference for an 8-year cycle. Was that seen as linking the strategy too closely to the President?

Gabriel Makhlouf: Some colleagues made the point that you just made, which is that eight years sounds as if you're tying it in to the President.  And what the ECB has is not a single decision-making model.

I think it is mainly for two reasons. One, it's sort of in line with general convention around the place. The other thing is that five years is a reasonable amount of time to both get ahead of change, but also take account of what you've done in the last five years.

Johanna Treeck: Would you describe the outcome of the review as an adaptation, reform or revolution.

Gabriel Makhlouf: I don't think a revolution, because it builds on the last review. It's ultimately still about price stability.

It is more than adaptation. I think adaptation gives the sense as if we're tinkering, but I don't think we are tinkering. Some aspects of the review probably qualify for radical reform. The climate change stuff is potentially radical reform, although by its nature, you're not going see it tomorrow.

It's quite impressive that it ended up being fairly quick and it ended up being unanimous. I think these are two things that people are very impressed by. Firstly, there was a lot of work done by staff, both the ECB staff but also national central bank staff.

Discussions were held in a very constructive, very open-minded way, it's a combination of the amount of work done by the staff. As I say, ECB and NCBs, but also think all the colleagues around the Governing Council table approached this in a very open-minded way, wanting to learn, wanting to understand, to question.

So we had some really good discussions throughout this whole period. The seminars themselves were not decision moments. They were genuine seminars where we have papers and we discussed them. Staff came in to present and answer the questions. And then we brought it all together at the end. As we moved faster than we expected, we said we can finish it. So let's finish. Why wait.

Johanna Treeck: What role did this idea to disentangle any sort of policy exit discussion from the strategy review play in speeding up the conclusion?

Gabriel Makhlouf: If anything, what sped up the conclusion was a feeling that it will not be fair to staff, for them to feel that they needed to work through August. We reached a view at the retreat that if we can finish this before the end of July we should, because it'll be good for everybody, especially the staff who have worked incredibly hard on it.

Johanna Treeck: Was there any tension at all, did anybody come in with a red line, or was it completely smooth?

Gabriel Makhlouf: There were issues that were there, there was a much stronger debate on some points than on other issues. Look, the are 25 people in the Governing Council, all of us got views and some of us have got different views, which is a good thing. It would be terrible if we all thought the same way and arrived at conclusions very quickly, without any discussion.  It would be one of the biggest risks to the economy to have as a central bank whose Governing Council just thought in this one-dimensional way. We had very good discussions. You know some of my colleagues felt that we should move to average inflation targeting. Some of us felt the opposite so we had a really good discussion about that. We look at things in a different way but the great thing is that at the end, we agreed unanimously.

Johanna Treeck: What role did Lagarde play in this. Was her management style very essential, or would you say it’s because we all think back to the times of when the Governing Council was divided, what changed. Is it just Christine Lagarde?

Gabriel Makhlouf: She plays a very important role in this. She chairs our meetings, invites us to speak, encourages us to get on with it, if we're taking too long to speak. She draws conclusions at the end of our discussion so it's a very important role and certainly her style is different from her predecessors. I had only a few meetings with Mario. It's too hard for me to say what would have happened, if we did the review with Mario, what the process and the outcome would have been. It was reflected in the statement, the views of the 25 members on the council, but the style of the process would probably have been different, because they're just different individuals.

I mean her role is important. It's very important, because her style is to arrive at a consensus. And that is important.

Johanna Treeck: How important do you think it is that there is unanimity on the review?

Gabriel Makhlouf: It’s very important. It's very important. I think we have differences. You know when I think about the future and making particular decisions at particular moments, I would not be surprised if there are differences, because that is a reflection of 25 individuals who've got different views, different perspectives, different experiences, and they see the world in a slightly different way. So on individual decisions I would not be surprised.

I think on the strategy as a whole, it is very important to have unanimity because it gives credibility, it gives it great certainty to markets and to the public, because it is ultimately the framework on which our decisions are going to be based in the future. So for that to be unanimous is important.

Johanna Treeck: Some people have said that may have presented a new strategy, but you have failed to deliver on your target for the last 10 years and presented no new tool that change that.

Gabriel Makhlouf: I think it's really fair enough in view of what's happened over the last 10 years. So being completely clear about the 2% symmetric target is important. I think in the end, we're only going to persuade people by our actions.