Lagarde seeks ECB green targeted lending

European Central Bank (ECB) president Christine Lagarde has said she hopes the ECB can introduce a green targeted lending facility, but has indicated that the issue may be controversial among the central bank’s governing council.

Speaking at last week’s Green Swan conference, Lagarde listed the measure as one of her top priorities, along with internationally harmonised climate-related disclosures, an EU green capital markets union, and a greater focus on nature-based solutions to carbon sequestration.

Lagarde said she hoped the ECB can “produce a page from the book of Yi Gang or from the book of Karoda,” referring to targeted green lending programs introduced by the People’s Bank of China and Bank of Japan. A similar ECB targeted lending mechanism “would help us with the financing of green projects,” she said.

Lagarde made clear that she is “not giving up” on green targeted lending, suggesting resistance within the governing council. “Japan is doing it. China is doing it. Why wouldn’t we have an open mind about it?” she asked. “I know it’s not squarely in the mandate and it is not necessarily in what we consider as the prime objective but, you know, if we don’t try then we have no chance of succeeding,” she added, “So count on me.”

“I’m sure that you’re on my side,” Lagarde said to Banque de France governor and session moderator François Villeroy de Galhau, adding that she hoped the council would not spend too much time debating this issue.

Her remarks came hours after the publication of an open letter from leading banking, monetary policy and green finance experts calling for a green discount interest rate on future refinancing operations. Organised by Brussels-based research and advocacy group Positive Money Europe, the letter said that since current inflationary pressures stem from an excessive reliance on fossil fuels energy, the solution is to double down on investment in energy efficiency and renewables.

The ECB should combat ongoing “fossilflation” by introducing a green discount interest rate on future bank refinancing operations to encourage lending for clean and secure energy production and for energy efficiency renovations, the signatories said. “Cheaper capital costs for these investments would stimulate the supply of green domestic energy, while also directly supporting households in navigating the cost of living crisis, by reducing energy consumption and bills.”

The ECB has operated a dual-rate targeted longer-term refinancing operations (TLTRO) programme since 2014, incentivising bank lending to households and non-financial corporations. The letter ends with a call for this dual rate innovation to be retained, and directed towards efforts to reduce fossil fuel demand and develop cleaner, more secure alternatives.

“The normalisation of monetary policy is overdue and it’s time to put the emergency tools back into the toolkit. Except for one,” said Carsten Brzeski, ING head of macro research and a signatory to the letter. “The ECB should continue using the concept of a dual rate as it could help significantly support sector-specific lending and in particular the green transition.”

“This is not the overheated economy textbook inflation. The ECB therefore risks looking in the wrong direction while fighting it,” warned Rens Van Tilburg, director of the Sustainable Finance Lab and also a signatory. “Accelerating the energy transition is needed to prevent fossil fuel prices destabilising other prices in the eurozone.”

Lagarde made further comments on green targeted lending following yesterday’s governing council meeting at which the ECB announced its intention to raise  key interest rates by 25 basis points at its July monetary policy meeting. “Some of us are also interested in looking at how we can support the financing of the measures needed against climate change,” she told a press conference. “I said already before that a green long term refinancing operation was interesting to consider.”

Lagarde’s position was strongly supported by Positive Money Europe executive director Stanislas Jourdan. “Raising interest rates won’t cut energy prices, and everyone knows it,” he told Green central Banking. Instead of blindly following a broken textbook, Christine Lagarde is right in pointing out to the possibility that deploying a green TLTRO programme would be a useful additional tool in the ECB’s toolbox in order to tame down energy prices volatility in the medium term.”

“Such a green lending facility will soon become technically feasible as banks start disclosing their green asset ratios under the taxonomy regulation,” he added. “The whole Eurosystem must urgently start exploring how to implement such an option in the near future.”

Although green targeted refinancing operations were considered during the ECB’s 2021 strategy review, they did not feature in the resulting climate policy roadmap.