The ECB changes inflation targets and “locks” the future use of quantitative easing

FRANKFURT – The ECB is clearer in its objectives, better equipped in its arsenal of tools, while ecological and social policies enter its policies at the same time as an expansion of the audience to which it intends to speak. The Frankfurt institution announced several notable 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 reshaping it with the words: «2% over the medium term, symmetrical». The definition used up to now, dating back to 2003, was “inflation below but close to 2 over the medium term” (ie 18-24 months), with the addition, from 2019, of the term “symmetrical”.

The ECB then specified that upward and downward deviations are indeed both considered “undesirable”, but adding that when the economy “operates near the lows of nominal rates”, the need to support it with vigorous and persistent measures, aimed at avoiding deviations on the downside, it may also “imply transitional periods in which inflation is moderately above target”. It means opening up to momentary and limited overruns of the target, on whose duration and scope however, the president Christine Lagarde, although pressed on several occasions during an explanatory press conference, did not allow more precise information to escape.

The new inflation target “is not a maximum threshold”, however, he wanted to remark. The old definition “was too elaborate and occasionally gave rise to misunderstandings about the intentions of the Council,” while “the new wording removes any ambiguity,” he argued.

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 indications of perspective that it itself indicates on rates) will remain part of the integral to the paraphernalia, to be used when necessary “, while interest rates remain the” primary instrument “.

The Frankfurt institution then announced that it intends to take the costs of residential real estate into account in the inflation (the reference is to that of a home occupied by the owner, which however can be understood as a tenant). We are talking here about the “costs of use, which have nothing to do with the investment cost – specified Lagarde -. We want to take into account the frustrations of many Europeans who complained that the housing cost was not adequately considered ».

In any case, “if you look at the history of the indices there is not a very significant variation” of this item with respect to general inflation.

One might wonder, then, why start a “multi-year process”, entrusted to Eurostat, to include this item in the assessment of inflation if it changes little? Probably because the Lagarde-led ECB wants to be more “inclusive”, as well as “green”.

And here we come to an ad hoc statement, which the ECB published in parallel to the one on the strategic review, in which it announces its intention to “further incorporate considerations on climate change” into its policies, “expanding the analytical capacity on models macroeconomics ”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”.

Apparently, therefore, the climatic parameter will not constitute a key requirement for monetary policy operations relating to purchases of government securities, 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”. 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 attempt to force green parameters into the heart of monetary policy therefore seems to have vanished at the moment. However, what Lagarde said at a recent conference in memory of the US Supreme Court judge, the ultra-progressive Ruth Bader Ginsburg, is significant. “In life, if you have a goal, if you have a dream, then it’s better to have a strategy. There will be stages along the way that will not necessarily be victories – he said – but that will carry you forward ».

And if you combine this with a further announcement – from now on the ECB will make strategic reviews on a regular basis, “we intend to carry out the next one in 2025”, the previous one was in 2003 and “we can’t wait 18 years again” – we you can get an idea of ​​how the experienced French policy maker intends to carry out its objectives. One step at a time. Perhaps at the same time as the succession of governors and central bankers who, Lagarde might hope, will become increasingly “green and social oriented”.

In any case, «yesterday the Governing Council approved the revision of the ECB’s strategy unanimously. And this result seems important to me, ”he claimed.

All these changes will begin to take effect from the next Monetary Governing Council, which will be held on July 22, the ECB said. The Council is the decision-making body in which all the central bank governors of the euro area sit, as well as the president and the other 5 members of the Executive Board.

But there is more. Lagarde announced changes and innovations to communication, which at the moment takes place in a manner based on the revision of 2003 “before the arrival of smartphones”. So “you will notice some changes in our communications in the weeks to come. For example, more concise and discursive releases will replace the introductory statement in our press conferences on monetary decisions, ”he said.

“But our communications will also be directed to a wider audience – he added – adapted through a more representative and accessible approach”.

(with source Askanews)

Source: RSS Economia by

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