Change of strategy: ECB changes inflation target | tagesschau.de

The European Central Bank is gaining more leeway when it comes to inflation: The monetary authorities are increasing the target annual rate of inflation in the euro area to two percent. The ECB should also become more climate-friendly.

The European Central Bank (ECB) has set itself a new inflation target and thus changed its monetary policy strategy. The monetary authorities around central bank chief Christine Lagarde are aiming for an annual inflation rate of two percent for the euro area, as the central bank announced.

So far, the goal had been “below, but close to two percent”. In its endeavors to ensure price stability in the currency area of ​​the 19 countries in the medium term, the ECB will now accept inflation rates that are “moderately above the target value” at least at times. With such a “symmetrical” inflation target, the central bank is no longer forced to react immediately if the inflation rates temporarily deviate upwards or downwards from the percentage target.

18 month strategy review

The changed inflation target is a core result of the review of the monetary policy strategy initiated by the President of the ECB, who has been in office since November 1, 2019. This was delayed by the corona crisis. Over the past 18 months, the focus has been on formulating price stability, the monetary policy instruments and communication of the central bank. The main goal of the central bank is a balanced price level – in the jargon of the monetary authorities: price stability. The ECB sees this most likely if prices in the euro area rise moderately.

However, the rate of inflation in the euro area has often been well below the two percent mark since 2013. And this despite the fact that the ECB has been pumping huge sums of cheap money into the markets for years and keeping interest rates at a record low. Critics have long accused the ECB of having maneuvered itself into a dead end with its rigid inflation target and are calling for more leeway.

The euro currency watchdogs also recommend that in future the prices for owner-occupied residential property should also be included in the calculation of the inflation rate, which they consider to be a key indicator for their monetary policy. However, the ECB sees this as a longer process.

The monetary authorities last revised their monetary policy strategy in 2003. At that time, they had specified their medium-term price stability target from the establishment of the ECB in 1998. Until then, it had been below two percent.

Climate protection should become more important

Another goal after the review is to give greater weight to climate protection in monetary policy. The central bank announced that the Governing Council had “decided on a comprehensive action plan with an ambitious roadmap to further incorporate climate protection considerations into its monetary policy framework.” With this decision, the central bank’s governing body is underlining its obligation to “take ecological sustainability considerations into account more systematically in its monetary policy”. When buying corporate bonds, the ECB has already started to consider “relevant risks of climate change” in its assessment procedures for asset purchases.

Lagarde had repeatedly reiterated that the ECB would contribute to efforts to combat climate change within the framework of its mandate. Whether central banks should support environmental policy goals with their monetary policy is controversial among central bankers and economists. The main question is whether a central bank should prefer sustainable securities to other securities when buying bonds.