The European Central Bank’s policymakers have agreed its first new strategy for almost two decades. It will be announced on Thursday and is likely to amend the inflation target while also addressing climate change and housing costs.
The 25 members of the central bank’s governing council met on Wednesday in Frankfurt to settle the results of the 19-month-long review. It was not due to be announced until September but after policymakers reached agreement on some matters, ECB president Christine Lagarde sought to complete the talks.
The ECB said late on Wednesday that the “core decisions” would be announced at 13:00 CET (12.00 GMT) on Thursday, after which Lagarde and vice-president Luis de Guindos will present the outcome at an online press conference.
The strategy review is expected to result in significant changes to ECB operations.
The most fundamental shift is likely to be how it defines its core mandate of “price stability”. After years of failing to lift inflation up to its objective, the ECB is expected to ditch its target of “close to, but below, 2 per cent”, which is considered too opaque and implies a cap on price growth.
There is widespread support on the council for a more straightforward 2 per cent target. The central bank is likely to emphasise that its new target is symmetric, so policymakers will be as concerned about exceeding it as being below it. The target will be a medium-term objective with flexibility to fluctuate in either direction in the short term.
However. the ECB is unlikely to go as far as the US Federal Reserve, which has formally committed to letting inflation exceed its target to make up for a period of low price growth.
Jacob Nell, head of European economics at Morgan Stanley, said he expected the change would have only “a modest impact on the monetary policy stance in the short term” as the central bank had already implicitly embraced the strategy.
But he said other expected changes would have “profound consequences over a longer time horizon”.
Since she took over from Mario Draghi in November 2019, Lagarde has urged the ECB to address growing public and political concern about climate change. The idea is expected to be central to the new strategy after early opposition from other council members faded.
The central bank is expected to announce plans for a green shift in its monetary policy. It will tilt its asset purchase portfolio and collateral rules away from companies with high carbon emissions that do not have a plan to meet the EU target to be net zero by 2050.
The change is likely to be phased in over several years because it will need greater disclosure by companies and the EU establishing a green classification system for investors, which will set out what areas are climate-friendly.
The central bank will also address public concerns that monetary policy does not take enough account of rising housing costs, by pushing the EU’s statistical body Eurostat to add housing to its inflation calculation.
House prices are rising in much of Europe and this change would add an estimated 20 basis points to the current rate of inflation, according to recent ECB research. At other times, it would reduce the overall pace of price growth.
