FRANKFURT – The European Central Bank (ECB) adopted a new inflation target on Thursday (July 8) and included climate change considerations into its monetary policy plan, marking the first substantial revision of the bank’s goals and tools in nearly two decades. In the future, the bank will evaluate a company’s environmental credentials when determining whether an asset qualifies as collateral or can be purchased by the Frankfurt institution.
As fears about the planet’s accelerated warming rise, the Eurosystem will begin conducting “climate stress tests” to examine the Eurosystem’s risk exposure to climate change.
READ: Commentary: In the fight against climate change, central banks are following suit. The bank claimed that drastic changes in the environment may have an impact on employment, output, or financial stability, and that taking climate issues into consideration was therefore well within its remit of preserving price stability. “In keeping with its mission, the ECB will amend the framework governing the distribution of corporate bond purchases to include climate change factors,” the bank said in a statement.
“These will include, at a minimum, issuer alignment with EU legislation implementing the Paris Agreement through climate change-related metrics or issuer commitments to such targets,” the central bank noted.
The ECB’s Christine Lagarde vowed that measures agreed upon by the 19-country single currency zone would have teeth.
“It isn’t just a collection of words; it isn’t even a speech. It is a pledge made by the entire governing council in terms of delivery time, deliverables, and goal attainment “She briefed reporters about it. READ: According to environmentalists, China and Brazil boast the world’s greenest central banks.
The environmental group gave a cautious welcome to what it called a “promising” announcement. “We’ll keep an eye on it and make sure it’s followed up with concrete action,” Greenpeace added. However, it noted that the ECB’s new policy makes it the first major central bank to lay the groundwork for the EU’s climate goals. Mauricio Vargas, the advocacy group’s finance expert in Germany, adding, “This sets the standard for all central banks: they should follow the ECB’s lead on climate, but faster.” “Other central banks will read this and consider how they might demonstrate a comparable commitment to greening monetary policy,” said Paul Diggle, deputy chief economist at Aberdeen Standard Investments. After an 18-month strategic review – the first since 2003 – the ECB made a major shift. In addition to consulting financial specialists, the ECB solicited input from the general public, civil society organizations, and academia. While introducing a climate change plan for the first time, the ECB also abandoned its previous inflation objective of “near to, but below” 2%, set in 2003 when rapid price increases were a major worry. READ: MAS to invest $1.8 billion in a green investment program with the goal of creating a climate-resilient portfolio TARGET “SYMMETRIC” Despite extraordinary economic stimulus from the ECB, inflation in the eurozone has remained low for years, keeping the objective out of reach and fueling calls for a rethink. The board said on Thursday that it had decided on a 2% target. “The Governing Council believes that aiming for a 2% inflation target over the medium term is the best way to ensure price stability,” it said in a statement. The bank dubbed it a “symmetric” target, implying that falling below it was just as “undesirable” as exceeding it, effectively eliminating the old target’s one-sided implication that it was preferable to undershoot than to exceed it. Nonetheless, the bank acknowledged that there may be a “transitory phase of substantially above target inflation.” Lagarde was quick to point out that the ECB did not go as far as the US Federal Reserve in allowing more room for inflation swings, and that any rate overshooting would only be short. To increase employment, the Fed announced last year that it would allow inflation to reach beyond 2% “for some time” before raising interest rates. READ: The Bank of Japan is launching a new strategy to combat climate change while maintaining policy stability. OVERSHOOT TOLERANCE Fears had been growing that the ECB might begin to cut off its cheap money taps in order to keep consumer prices low, since inflation is forecast to soar above 2% as Europe’s economic recovery accelerates. The ECB is presently pursuing an extraordinarily expansionary policy, with ultra-low interest rates and a global emergency bond-buying scheme of €1.85 trillion (US$2.2 trillion) meant at keeping borrowing costs low to encourage spending and investment. However, Berenberg bank’s Holger Schmieding said the ECB was “signaling an even stronger tolerance of a short overshoot than we had expected” with Thursday’s news. “Under the current circumstances of ultra-low nominal and real interest rates, the ECB is giving its plan a dovish bent,” he said. Those who advocate for significant economic support are known as “doves,” whereas those who advocate for tougher measures are known as “hawks.”/n
