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Race to replace Draghi spurs ECB calls for Fed-style rethink

Olli Rehn's strategy review idea is short on specifics but has raised his profile among hopefuls for ECB president post

Zurich

THE race to succeed Mario Draghi could end up producing not only a new European Central Bank president, but also a revamped mandate.

That's a potential outcome from a review of the institution's strategy called for by Olli Rehn, a contender for the job who is willing to shake things up in his attempt to stand out from the crowd of candidates. The Bank of Finland governor wants a rethink of the ECB's master plan for ensuring price stability, at a time when no amount of stimulus seems enough to boost inflation.

His idea is short on specifics but has raised his profile in a field of hopefuls that includes the heads of the German and French central banks, a serving ECB board member and even Mr Rehn's own predecessor. It could also backfire though, by splitting ECB policymakers and alarming some of the political leaders whose job it is to pick the next president this summer.

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"Rehn is clearly one of the guys angling for the top job," said Peter Dixon, an economist at Commerzbank. Irrespective of his motivation, "it's incumbent on central banks to ask themselves after 10 years of zero, or in the ECB's case negative, rates what more can they do to achieve their objectives".

The 57-year-old Finn, a former European Union commissioner who took over as governor in July, is tapping into the zeitgeist by identifying seemingly entrenched low inflation and rates as a fundamental concern. The US Federal Reserve is the most prominent central bank now rethinking how it operates in the post-crisis economy.

Mr Rehn isn't offering solutions though. He says he simply wants to ensure ECB monetary policy remains credible, and reiterated that desire last week. "I wish that the outcome of a strategy review, if and when launched, will lead to more effective and timely monetary policy that fulfills our primary objective of price stability."

The ECB last dived into its policy framework in 2003. For all the bank's claims that its negative interest rates, massive bond purchases and other unconventional policies have been a success, eurozone inflation has persistently fallen far short of the goal of "below, but close to, 2 per cent".

"It's just good practice for central banks to review occasionally what they are doing," said Stefan Gerlach, chief economist at EFG International and a former deputy governor of the Irish central bank. "One can't help but feel that some disagreements in the Governing Council have come from people having different interpretations of what the ECB's definition of price stability meant in practice."

The calls for a rethink have some support. Austrian governor Ewald Nowotny said last week that "aspects" of the mandate warrant revisiting. Agustin Carstens, the head of the Bank for International Settlements, said central banks are "acutely aware of the need to adapt" their frameworks.

That opens the way to ideas such as allowing inflation to temporarily overshoot to compensate for past years of weak price growth. Mr Rehn doesn't necessarily go that far but he does support a "symmetrical" approach to inflation, as does Mr Draghi.

A more flexible approach to inflation is likely to raise hackles in countries such as Germany, whose government will have an influential say in appointing the next president. The nation's conservative monetary stance is typically articulated by Bundesbank president Jens Weidmann, another contender for the top job, who has said he's "convinced" that the inflation goal remains appropriate.

There may also be internal opposition. Chief economist Peter Praet cautioned against major changes in a speech last week, saying "the framework has served us well". While his eight-year term ends this month, his views could reverberate within the organisation.

Mr Draghi leaves in October, with political leaders likely to make their choice after EU elections in late May. BLOOMBERG