The European Central Bank renews strategy and inflation target

The European Central Bank has completely overhauled its monetary policy strategy and intends to get involved in monetary policy in the fight against climate change in the future. "The new strategy is a strong foundation that will guide us in monetary policy in the coming years," said Central Bank President Christine Lagarde. The core of the most comprehensive revision of the monetary policy procedure to date is a new inflation target that allows the monetary authorities a little more flexibility. The euro watchdogs are now aiming to increase consumer prices in the euro area by two percent in the medium term. This is a slight increase in the inflation target, which had previously been below, but close to, two percent. However, this formulation was discredited because, from the point of view of many experts, it suggests that the ECB wants to fight inflation that is too high rather than too low. In the past few years, the central bank has almost exclusively been confronted with too weak growth and too low inflation rates in the 19 countries of the euro zone. It was only the gradual subsidence of the pandemic and the sharp rise in prices - for raw materials such as oil, for example - that pushed the inflation rate in the euro area up to 1.9 percent in June. The ECB has missed its previous target since spring 2013. "We believe that those two percent are clearer and easier to communicate," said Lagarde. This means that the ECB also agrees with other central banks around the world. Two percent is the generally accepted definition of price stability. The ECB stated that its new inflation target should be understood symmetrically - that is, an upward and downward deviation is equally undesirable. If interest rates in the economy are particularly low, particularly strong or long-lasting monetary policy measures may be necessary. The ECB also wants to tolerate a temporary exceeding of the inflation target. "This may be accompanied by the fact that inflation is temporarily slightly above the target value," explained the monetary authorities. From the point of view of economists, the ECB has given itself a little more leeway with the new inflation target. "With the introduction of a symmetrical inflation target, the ECB has greater flexibility," said Ralf Umlauf, an economist at Helaba. "Since the target has also been raised to two percent, it can be assumed that monetary policy will remain loose for the time being." From the point of view of Friedrich Heinemann from the ZEW Institute, it will now be even easier for the ECB to justify the continuation of an extremely loose monetary policy and bond purchases in the coming years. "Just at the moment when some euro countries have become completely dependent on the ECB's bond purchases for their financing due to the crisis, the Governing Council is lowering its long-term ambitions to limit inflation," he criticized. The economist Volker Wieland misses, among other things, an analysis of whether the loose monetary policy played a role in the build-up of financial stability risks before the financial crisis.