4 Minute Read by Reuters Staff Reuters – FRANKFURT (Reuters) – After a strategic review that marks Europe’s most powerful financial institution’s greatest reform to date, the European Central Bank set a new inflation target and claimed a role in combating climate change on Thursday. On January 23, 2020, the European Central Bank (ECB) logo was photographed in Frankfurt, Germany. Ralph Orlowski/REUTERS The eurozone’s 19 central banks have taken on a variety of responsibilities throughout the years, ranging from bank supervision to payment infrastructure, particularly in the aftermath of the eurozone’s debt crisis a decade ago. Its first strategic review since 2003 was long overdue, and when Christine Lagarde took over from Mario Draghi in late 2019, she made it a top priority. The project was supposed to take a year, but it was extended to 18 months because to policymakers’ concern on the COVID-19 epidemic. The European Central Bank (ECB) set its medium-term inflation objective at 2%, abandoning a prior formulation of “below but close to 2%,” which gave the impression that it was more concerned about price rise beyond the target than below it. The important question for investors was whether the ECB would be willing to let inflation overshoot its target in the future, or if it would follow its American counterpart in aiming average inflation over a longer time to “make up” for missed price growth. The ECB indicated that inflation above and below its objective were both undesirable, and that it would not strive to overshoot after a longer period of low inflation, resolving one of the most contentious concerns among officials. “This aim is symmetric,” the ECB explained, “meaning that both negative and positive deviations from the target are undesirable.” However, the bank acknowledged that in some circumstances, such as when extra-vigorous or long-term monetary support is required, inflation may moderately exceed its target for a short time. However, its new policy does not commit to an inflation overshoot after extended periods of low price growth, which could be a disappointment for investors hoping for such a promise that would provide stimulus deep into the recovery. A commitment to allowing inflation to briefly exceed its objective was seen as improving the ECB’s credibility with markets, demonstrating that its target is symmetric and policymakers do not consider 2% as a ceiling, a problem the bank had with its prior target. However, it is a politically dangerous step, especially among inflation-averse Germans, and Bundesbank chief Jens Weidmann fought the move until the latter end. The ECB also stated that the current gauge of inflation is unsatisfactory since it excludes a major portion of housing prices, thus policymakers will consider different inflation measures. “The Governing Council will enhance its set of broader inflation indicators with inflation measures that include first estimates of the cost of owner-occupied housing in its monetary policy evaluations,” it added. The ECB announced that it will do more to aid in the fight against climate change, including incorporating climate change considerations into monetary policy operations in the areas of disclosure, risk assessment, collateral framework, and corporate sector asset purchases. This is perhaps the most significant change. Balazs Koranyi contributed reporting, and Catherine Evans edited the piece./n
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