Christine Lagarde, President of the European Central Bank, speaks at a joint press conference in Lisbon, Portugal. Getty Images News | Horacio Villalobos | Getty Images LONDON, United Kingdom — The European Central Bank opted to alter its inflation target and allow consumer prices to exceed when necessary in a significant policy review released on Thursday. The Frankfurt central bank conducted its first policy review since 2003 in January of last year. However, due to the coronavirus epidemic, the results of this experiment had to be postponed. The purpose was to see how the ECB’s policies and tools may be tweaked to accomplish its fundamental goal of price stability. The ECB is now aiming for an inflation rate of “below, but close to” 2%. In the future, the official inflation target will be set at 2%, with overshoots permitted. “The Governing Council believes that aiming for a 2 percent inflation target over the medium term is the best way to ensure price stability. This aim is symmetric, which means that both negative and positive deviations from the target are undesirable “In a statement, the ECB noted. On July 22, the Governing Council will hold its first regular monetary policy meeting under the new strategy. What does it mean? “On paper, a move from a de facto inflation target of just below 2% to a straight 2% target, as well as a shift from a cap just below 2% to a symmetrical approach, which explicitly allows for temporary overshoots, would raise the inflation target and thus signal an even softer policy stance,” Holger Schmieding, Berenberg’s chief European economist, wrote in a note. “In practice, we don’t think it will make much of a difference because the majority of council members are probably striving for that anyhow. The new policy is more in line with other major central banks’ approaches “Added he. Last year, the Federal Reserve in the United States announced that, in order to stimulate the labor market and economic recovery, it would allow inflation to run higher than typical. This indicates the central bank will be less likely to raise interest rates in the future. The ECB’s recent measures come after a protracted period of low inflation, with the goal of reversing this trend. This is especially important in the coming months, as inflation is expected to rise as the euro zone recovers from the Covid-19 issue. The ECB predicted that inflation would reach 1.9 percent by the end of the year in June predictions. In fact, recent data shows that prices in the eurozone have overshot. The ECB, on the other hand, continues to believe that these price increases are only temporary and that inflation will remain below 2% for the foreseeable future. Changes in the climate President Lagarde of the European Central Bank has stated that climate change is a personal concern of hers, and that she is eager to lead the central bank down a greener route. As a result, according to the most recent policy review, the ECB would alter its activities to take climate risks into account, including when determining which corporate bonds to buy. “In accordance with its mandate, the ECB will modify the framework that guides the allocation of corporate bond purchases to include climate change criteria. These will include, at a minimum, issuer alignment with EU legislation implementing the Paris Agreement via climate change-related indicators or issuer commitments to such goals “In a statement, the ECB stated. By the first quarter of 2023, the central bank said it will also be providing climate-related data via its corporate asset acquisition program. Corporate bonds only make up a small part of the ECB’s overall quantitative easing portfolio, according to Marchel Alexandrovich, a senior European economist at Jefferies. “As a result, these modifications are unlikely to have a significant impact on the ECB’s overall policy stance, given that the vast majority of its asset purchases are concentrated in government debt,” he added. The ECB, on the other hand, will take climate change risks into account when determining which assets can be used as collateral, and has stated that it will expand its capacity to integrate climate risk in its macroeconomic evaluations./n
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