ECB Forum on Central Banking, day 1 – live blog

The European Central Bank’s (ECB) Forum on Central Banking has been held annually since 2014, normally in the Portugese town of Sintra. It is the ECB’s main conference event of the year and brings together central bank governors, academics, financial market actors and others to discuss current policy issues and key topics from a longer-term perspective. This year’s forum is being held online in a truncated form, consisting of two four-hour afternoon sessions.

Green Central Banking will provide all the climate-related news and commentary from the conference as it happens in this live blog.

The theme of this year’s event is Beyond the Pandemic: the Future of Monetary Policy and the aim is to examine the implications of key structural changes for monetary policy in the euro area. Climate change and the transition to a low-carbon economy is at the top of the list for discussion, but topics also include corporate insolvency rules, productivity, and business dynamics.

The first day of the conference focuses on corporate indebtedness and the second day on climate change, with the format consisting of paper presentations and panel discussions. It begins today with a speech from ECB president Christine Lagarde and concludes tomorrow with a panel discussion in which Lagard will be joined by Bank of England governor Andrew Bailey, Bank of Japan governor Haruhiko Kuroda, and Federal Reserve chair Jerome Powell.

The full programme, all papers and detailed conference proceedings are available on the ECB’s website. Climate-related commentary from civil society organisations on the ECB’s recent strategy review has been published by Positive Money and the Council on Economic Policies.

Catch up on coverage of the second day of the forum.

Recent climate-related activity from ECB

13:45 CET

This year’s ECB Forum on Central Banking comes after a flurry of climate-related activity from the central bank.

Following a lengthy strategy review, the ECB released a climate roadmap in July, promising to introduce climate risk into the eligibility criteria of its collateral framework and to green its corporate asset purchases. Criticised by civil society groups for being too narrow, slow and unambitious, the plan was informed by a comprehensive background document outlining the potential for much greater action.

The forum is being held a week after the ECB released the results of its economy-wide climate stress test, which found that damage to physical collateral as a result of climate change represents a considerable risk exposure for many eurozone banks.

Recent research has also found that the 11 largest banks in the eurozone are highly exposed to a collapse in fossil fuel asset values and to fossil fuel loans.

Keynote speech by Christine Lagarde

14:30 CET

The conference began with the words “climate change” and a dramatic video montage outlining the key themes. Following a few words from Financial Times journalist and conference moderator Claire Jones, ECB president Christine Lagarde kicked off the proceedings with a keynote speech titled Monetary Policy During an Atypical Recovery.

The Covid-19 pandemic has been an unusual event with unusual economic effects, Largarde explained. The recovery too will be unusual, and the ECB predicts the current inflationary pressures will be temporary, and that backlogs and bottlenecks in both demand and supply will ease. By 2023 core inflation is expected to be only 1.5%, Largarde said, as pandemic-related price instability works its way out of the economy.

The pandemic has introduced and accelerated new influences on price stability, Largarde said, identifying digitalisation and limits to demand for high-contact services as influencing factors. However, in the longer term the green transition will also have a significant impact. Carbon pricing, increasing auction prices of the EU’s Emissions Trading System, and the adoption of a carbon border adjustment mechanism could all have a direct inflationary impact.

Lagarde pointed to estimates from the Network for Greening the Financial System which predict that ambitious EU transition policies could increase inflation relative to its previous trend by up to one percentage point over the transition period – a significant increase in inflationary pressure.

The green transition will also make transmission of energy prices to consumer prices more complex, Largarde said, calling for greater understanding of the energy mix and how different energy sources are linked. The ongoing rise in fossil gas prices is an example of this complexity, she noted.

Lagarde concluded with a review of the monetary policy implications. There should be a decisive boost to private spending once the pandemic uncertainty fades, and this will be enhanced by the €330 billion every year that the European Commission estimates is needed by 2030 to achieve Europe’s climate and energy targets.

Insolvency rules and corporate indebtedness

16:45 CET

The first afternoon session explored transmission channels of economic shocks, but offered no direct reference to climate change. Professor Victoria Ivashina of the Harvard Business School presented her paper on Corporate Insolvency Rules and Zombie Lending, in which she identified zombie lending and a weak insolvency framework as sources of spillover effects from economic shocks on long-term growth. The presentation was followed by a discussion with Simeon Djankov of the London School of Economics chaired by ECB vice-president Luis de Guindos.

Second on the afternoon’s agenda was Moritz Schularick, professor of economics at Sciences Po and the University of Bonn. Presenting on Corporate Indebtedness and Macroeconomic Stabilisation from a Long-Term Perspective’, Schularick used a historical analysis to show the macroeconomic aftermath of corporate debt booms is usually benign. Egon Zakrajšek, senior adviser at the Monetary and Economic Department of the Bank for International Settlements, joined for a discussion chaired by ECB executive board member Fabio Panetta.

The future of inflation

18:15 CET

The day ended with a panel discussion on the future of inflation, featuring Charles Goodhart (London School of Economics), Gita Gopinath (International Monetary Fund) and Francesco Lippi (Luiss Guido Carli University).

ECB executive board member Isabel Schnabel chaired the session, beginning with a review of the structural factors influencing inflation. Schnabel reiterated Lagarde’s earlier conviction that the current increase in inflation is transitory and is associated with the unusual effects of the Covid-19 pandemic (see 14:30 above).

Gopinath predicted that current inflation would last a few quarters, but would return to the pre-pandemic level. Pointing out that current inflation was largely goods-price inflation, Gopinath pointed to pent-up demand and supply bottlenecks as drivers. Services inflation, in contrast, has remained stable.

Goodhart took a wider perspective. “We have no generally accepted theory of inflation,” he said, adding that the Phillips Curve has also been behaving oddly. Inflation expectations are the result of extrapolation, not analysis, Goodhart said, suggesting this is a backward-looking view that ignores the uncertainty of new developments. Quoting extensively from a recently released Fed paper, Goodhart was clear in his view that inflation expectations are of little practical use.

Lippi, a professor at Luiss Guido Carli University, examined the technical details of inflation expectations and inflation dynamics, predicting that inflation would return to pre-pandemic levels.

Discussion revealed a division between Goodhart on one hand and Lippi and Gopinath on the other, with Goodhart arguing that accepted ideas of inflation are deeply flawed. “I don’t want to throw the baby with the bathwater,” countered Lippi, saying a lot is known about inflation, despite many flaws.

Bank of England governor Andrew Bailey joined the Q&A to say that “rational inattention” is only to be expected after a long period of low and stable inflation.

Overall the panel discussion was really about one topic – how long the current spike in inflation will last. All agreed it would be transitory, and this was the central message coming out of this first day.

Today’s presentations and discussions touched on climate change only tangentially, focusing on more general economic shocks, including those from the Covid-19 pandemic. However, climate change will be central tomorrow when the theme is structural change and the effects of climate change on monetary policy.