The change, announced Thursday as part of the first review of the Frankfurt-based institution’s strategy since 2003, marks a major break with the conservative monetary doctrine of the German Bundesbank which formed the basis for the creation of the euro. .
The central bank has also revealed its intention to tackle climate change risks by diverting its asset purchases and guarantee rules from high carbon companies that are not aligned with EU climate targets. He coped with soaring house prices by promising to incorporate the cost of owning a home into his measure of inflation.
After years of failing to bring inflation up to its target, the ECB dropped its target of “near but below 2%”, which policymakers said was too opaque and involved a cap. of price growth.
The central bank said its new 2% target was symmetrical, “which means negative and positive inflation deviations from the target are also undesirable.” The new target is a medium-term goal with flexibility to fluctuate back and forth in the short term.
ING economists said the change meant the ECB was “structurally more accommodating.” But ECB President Christine Lagarde said: “I don’t think we are pushing the level [at which] we would start to tighten.
The main change for investors is the ECB’s statement that after a period of persistent interest rates and inflation expectations, as in recent years, it can temporarily tolerate a rise in inflation above its goal.
“When the economy operates near the lower limit of nominal interest rates, it requires particularly aggressive or persistent monetary policy action to prevent negative deviations from the inflation target from perpetuating,” he said. declared the ECB. “It may also involve a transitional period in which inflation is slightly above target. “
However, the ECB has not gone as far as the US Federal Reserve, which formally committed to a flexible average inflation target last year. This means that it will aim for price growth to exceed its target to compensate for a short period of operation.
Lagarde said, “Are we doing average inflation targeting like the Fed? The answer is absolutely no.
Konstantin Veit, portfolio manager at Pimco, said: “At the heart of the challenge facing the ECB of bringing inflation down to 2%, the review is probably insufficient because it does not answer the question of how monetary policy can be configured to generate such files. . . inflation targets.
Andrew Kenningham, an economist at Capital Economics, said that although “the immediate implications [for the path of monetary policy] are modest ”, the decision was still“ a historic turning point for the ECB ”and“ the end of the tradition of the Bundesbank, which has always emphasized the risks of high inflation above all ”.
To address the risks of climate change, the ECB said it would “adapt the design of its operational monetary policy framework with respect to disclosures, risk assessment, corporate sector asset purchases and the framework of guarantees ”.
Many of these measures will likely take years to come into effect. For example, he said that including the costs of owner-occupied housing in the official calculation of inflation is a “multi-year project”, but in the meantime it will factor it into its more price indicators. wide.
The central bank said Brussels will need to legislate to allow it to require companies to disclose climate risks to assess whether their obligations are excluded from its asset purchase and guarantee programs. It should therefore not come into force until 2024.
Some economists have been disappointed that the ECB did not go further. Daniela Gabor, professor of economics at the University of the West of England, said on Twitter that she was “letting down those of us who expected an ambitious approach.”
Analysts had predicted that the ECB could announce changes to its asset purchase program to avoid reaching its self-imposed limits on the amount of sovereign debt it can hold. But that was left to a separate decision on how to end his crisis-fighting political measures later this year.
The central bank has said it will conduct “periodic” reviews of its strategy, with the next one starting in 2025.