ECB sets new inflation target and role of climate in updating strategy

The logo of the European Central Bank (ECB) in Frankfurt, Germany on January 23, 2020. REUTERS / Ralph Orlowski

FRANKFURT, July 8 (Reuters) – The European Central Bank on Thursday set a new inflation target and claimed a role in tackling climate change after a strategic review that marks the biggest overhaul to date of the most powerful institution finance from Europe.

The central bank of the 19 countries that use the euro has taken on a range of roles over the years, from banking supervision to payment infrastructure, particularly in the aftermath of the bloc’s debt crisis a decade ago.

Her first strategic review since 2003 was long overdue and ECB Director Christine Lagarde made it a key priority when she took over from Mario Draghi at the end of 2019. The project was scheduled to last a year, but was extended to 18 months as policymakers focused on the response. to the COVID-19 pandemic.

In a move signaled by policymakers, the ECB set its inflation target at 2% over the medium term, abandoning previous wording for “below but close to 2%”, which had created the impression that it was falling. worried more about price growth above target than below.

But after nearly a decade of exceeding that target, the key question for investors was whether the ECB would be willing to let inflation exceed its target in the future, or whether it would follow its US counterpart in targeting the average inflation over a longer period to “compensate” for the loss of price growth.

Addressing what had been one of the most controversial issues among policymakers, the ECB said inflation above and below its target was both undesirable and would not aim to exceed after a long time. low inflation.

“This target is symmetrical, which means that negative and positive inflation deviations from the target are also undesirable,” the ECB added.

But the bank admitted that in certain situations, when particularly strong or persistent monetary support is needed, inflation could moderately exceed its target during a transitional period.

His new policy came to a halt before committing to an inflation breach after long periods of weak price growth, however, a possible disappointment for investors seeking such a commitment, which would ensure a stimulus for a good period of time. part of the recovery.

A commitment to let inflation temporarily exceed its target has nonetheless strengthened the ECB’s credibility with the markets, because its target is indeed symmetrical and policymakers do not perceive 2% as a ceiling, a difficulty to which the bank has been. confronted with its previous objective.

But it is a politically risky move, especially among inflation-fearing Germans, and Bundesbank chief Jens Weidmann has opposed such a change until the very end.

The ECB has also said it is not happy with the current measure of inflation because it has omitted much of the cost of housing, so policymakers will be looking at other measures of inflation as well.

“The Governing Council in its assessments of monetary policy will take into account inflation measures that include initial estimates of the cost of owner-occupied housing to complement its set of broader inflation measures,” he said. he declares.

In perhaps the most important change, the ECB said it would do more to help tackle climate change and include climate change considerations in monetary policy operations in disclosure areas. , risk assessment, guarantee framework and corporate sector asset purchases.

Reporting by Balazs Koranyi; Editing by Catherine Evans

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