ECB Lagarde presents its first policy review in almost two decades – .

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ECB Lagarde presents its first policy review in almost two decades – .


European Central Bank President Christine Lagarde delivers remarks at a joint press conference in Lisbon, Portugal.
Horace Villalobos | Getty Images News | Getty Images
LONDON – In a major policy review presented on Thursday, the European Central Bank decided to revise its inflation target and allow consumer prices to exceed if necessary.
In January last year, the central bank in Frankfurt began its first policy review since 2003. However, the outcome of this work had to be postponed following the coronavirus pandemic. The idea was to assess how to adapt the policies and tools of the ECB to achieve its main objective of price stability.

The ECB is currently striving to achieve a level of inflation “lower, but close to 2%”. In the future, the official inflation target will rise to 2% with authorized overruns.

“The Governing Council considers it preferable to maintain price stability by aiming for an inflation target of 2% in the medium term. This target is symmetrical, which means that negative and positive inflation deviations from the target are also undesirable, ”the ECB said in a statement. .

The first regular monetary policy meeting of the Governing Council implementing this new strategy will be held on 22 July.

What this means

“On paper, moving from a de facto inflation target just below 2% to a direct target of 2% and moving from a ceiling just below 2% to a symmetrical approach, which explicitly allows temporary overruns would raise the inflation target. and thus signal an even softer political stance, ”said Holger Schmieding, chief European economist at Berenberg, in a note.
“In practice, it won’t make a major difference in our opinion, as the majority of board members have probably targeted it anyway. The new strategy is more in line with that of the other major central banks, ”he added.
The US Federal Reserve also announced last year that it would allow inflation to rise higher than normal in order to stimulate the labor market and economic recovery. This effectively means that the central bank is less likely to raise interest rates.

The ECB’s latest efforts come after a prolonged period of low inflation and are aimed at trying to reverse this trend.

This is particularly relevant in the coming months, with inflation set to accelerate as the eurozone resurfaces after the Covid-19 crisis.

In the forecast presented in June, the ECB indicated that inflation could reach 1.9% by the end of the year. Recent data has in fact shown price overshoot in the eurozone. However, the ECB still believes that these price increases are temporary and that inflation will remain below 2% for the foreseeable future.

Climate change

ECB President Lagarde said climate change was an issue close to her heart and that she was keen to take the central bank on a greener path.

As such, the latest policy review also indicates that the ECB will adjust its work to incorporate climate risks, including when deciding which corporate bonds to buy.

“The ECB will adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria, in line with its mandate. These will include aligning issuers with, at a minimum, EU legislation implementing the Paris Agreement through climate change measures or issuers’ commitments to such targets, ”said the Minister. BCE in a press release.

The central bank has said it will also disclose climate-related information as part of its corporate asset purchase program by the first quarter of 2023.

Marchel Alexandrovich, senior European economist at Jefferies, said corporate bonds are only part of the ECB’s full quantitative easing portfolio.

“So these changes won’t really make a major difference in the overall political stance of the ECB, given that the bulk of its asset purchases are concentrated in sovereign debt,” he added.

However, the ECB will also take climate change risks into account when considering which assets can be considered collateral and has said it will increase its ability to include climate risk in all of its macroeconomic assessments.

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