• ECB: "The economy restarts with vaccines, rebound in the second quarter"

  • ECB, Lagarde: economic prospects improve and growth will accelerate

  • The ECB leaves interest rates on hold.

    Lagarde: "A tightening would create risks"

Share

08 July 2021 The ECB has announced several major changes to various key aspects of its monetary policy, at the end of the strategy review process launched in early 2020, suspended in the acute phase of the pandemic, and now just concluded. First of all, it decided to change its inflation target (also called the definition of price stability) by quantifying it as "2% over the medium term" and "symmetrically".



Until now, the definition was "inflation below but close to 2 over the medium term" (ie 18-24 months). The ECB specified that upward and downward deviations are both deemed "undesirable", but adding that when the economy "operates near nominal rate lows", the need for persistent monetary measures to avoid downward deviations "may also imply transitional periods in which inflation is moderately above the target ".



The ECB then decided that the various unconventional monetary policy instruments used in these years of crisis and not, such as securities purchase plans and "foward guidance" (the forward-looking indications that it itself indicates on rates) will remain part of the integral part of the paraphernalia, to be used when necessary ", while interest rates remain the" primary instrument. "



Finally, the Frankfurt institution announced that it intends to consider the costs of inflation and the assessment of price stability as well. residential real estate (the reference is to that of an owner-occupied home) Initially it will make use of estimates, with the prospect of a "multi-year plan" to integrate this aspect into the measurement of inflation.



All these changes will begin to take effect from the next Monetary Governing Council, which will be held on July 22, the ECB said.



According to the president, Christine Lagarde, "the new strategy is a solid basis that will guide us in the conduct of monetary policy in the years to come".



The new inflation target of the ECB "is not a maximum threshold", underlined the president of the ECB, Christine Lagarde in the press conference on the results of the review of the strategy.



The past definition of price stability (inflation below but close to 2%) "was too elaborate and occasionally shattered the intentions of the Council", while the "new wording" (inflation of 2% over the medium term is symmetrically , but opening up to transitional periods in which in the event of economic weakness inflation can be placed "moderately above the target") "removes any ambiguity", he argued. 



At the ECB "we cannot wait again 18 years for a review of the strategy", from now on they will take place on a regular basis and "we intend to carry out the next evaluation in 2025", announced the president Christine Lagarde.



The ECB announced its intention to "further incorporate climate change considerations" into its policies, "expanding the analytical capacity on macroeconomic models" on these aspects. And that it intends "to include climate considerations in monetary policy operations on communications, risk assessments, collateral securities and purchases of securities of private issuers". This is stated in an ad hoc press release on these aspects, issued in parallel with the communication on the results of the review of the strategy.



Apparently, therefore, the climate parameter will not constitute a key requirement for monetary policy operations relating to purchases of government bonds, which represent the most significant part in the balance sheet of the ECB and the Eurosystem.



The ECB also announced that it will implement "an action plan, in line with EU progress and initiatives on environmental sustainability, communications and reporting".