European Central Bank Changes Its Inflation Fighting Strategy


By adjusting the guidelines it uses to set monetary policy, the European Central Bank said on Thursday it will open up more room to implement crisis measures even if inflation rises above its official target. The bank also said it will begin using its influence in the bond markets to combat climate change.

After 18 months review of the strategy, the bank’s Governing Council said on Thursday it will no longer aim to keep inflation below 2 percent, a key principle since 2003, instead the bank will target just 2 percent and be “ready to accept a temporary period.” Inflation is moderately above target.”

“It’s not the two percent ceiling,” European Central Bank President Christine Lagarde said at a news conference on Thursday.

The seemingly minor change gives the bank room to continue pumping credit into the eurozone economy even if annual inflation rises above target, as long as policymakers think the bounce is temporary.

This could happen soon. Inflation in the euro area has hovered around 2 percent in recent months and could rise further as economies reopen and shortages of needed products such as semiconductors become more severe. Under the previous strategy, the central bank would have to take other measures to raise interest rates or slow the economy, even if the crisis did not end.

By law, controlling prices in the 19 eurozone countries is the central bank’s top priority, so any adjustments to its approach to inflation have far-reaching effects on the interest rates businesses and consumers pay on loans, employment and economic growth.

The bank also said it would consider climate change when purchasing corporate bonds as part of stimulus measures. Bond purchases with newly created money are one of the bank’s main tools to encourage borrowing and economic growth. However, in the future, the European Central Bank will prefer companies that make sincere efforts to reduce the amount of carbon dioxide they produce.

In practice, the central bank has provided ample evidence that it is willing to bend its own rules to tackle the pandemic or the debt crisis that nearly destroyed the euro a decade ago.

“A more modern and clearer strategy will make it easier for the ECB to communicate with markets and the public,” Berenberg Bank chief economist Holger Schmieding told clients. “It sanctifies the flexibility that the ECB has already given it.”

It is certain that the new approach of the European Central Bank will receive criticism from places like Germany where the fear of inflation goes deep. Jens Weidmann, member and chairman of the Governing Council of the German Central Bank Bundesbank, has called on the European Central Bank to start turning down stimulus to ensure inflation does not spiral out of control. He also said that climate change is not a matter of central banks. However, Ms. Lagarde said the members unanimously approved the new strategy.

The Governing Council on Thursday defended its decision to make climate change the task of central banks, calling it “inflation, output, employment, interest rates, investment and productivity; financial stability; and the transmission of monetary policy.”



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