ECB Launches Average Inflation Targeting, Will Tackle Climate Change

As previewed earlier, after a lengthy 18 month consultation period in which it did its best to imitate the Fed, on Thursday the ECB finally unveiled its “new monetary policy strategy” which – like the Fed – consists of a symmetric 2% inflation aim, effectively raising its inflation goal and saying that – like the Fed and its average inflation targeting regime – it’s willing to tolerate a limited overshoot of the target, the outcome of a strategy revamp aimed at bolstering the economy after years of subpar prices and growth, yet as noted previously the ECB’s new inflation goal, which many had expected, is just that – a goal; how it actually gets there is the real question.

As Bloomberg notes, the strategy review is the first by the Frankfurt-based institution since 2003, and the most comprehensive and ambitious attempt to rethink its role in serving the euro zone’s 342 million citizens since the creation of the single currency.

Specifically, the ECB agreed to seek consumer-price growth of 2% over the medium-term with a “symmetric” aim that could “imply a transitory period in which inflation is moderately above target” which represents a significant change from the “below, but close to, 2% over the medium term” wording which some felt was too vague and led to calls for tighter policy too soon. ECB officials also said they will start considering owner-occupied housing costs in their supplementary measures of inflation, a move that seeks to provide a support to inflation readings.

“While taking the ECB’s primary mandate of price stability as a given, the review has allowed us to challenge our thinking, engage with numerous stakeholders, reflect, discuss and reach common ground on how to adapt our strategy,” ECB head Christine Lagarde said in a statement. “The new strategy is a strong foundation that will guide us in the conduct of monetary policy in the years to come.”

Here is a snapshot of the ECB’s New Strategy

• Inflation goal changed to “symmetric” target of 2% over the medium term from “below, but close to, 2%”
• ECB may allow transitory period in which inflation is moderately above target
• Governing Council recommends inclusion of owner-occupied housing into inflation measure over time
• Climate-change considerations will be included in monetary policy operations in areas of disclosure, risk assessment, collateral framework and corporate-sector asset purchases
• New strategy will be applied starting with July 22 monetary policy meeting
• Governing Council intends to assess its strategy periodically, with the next assessment expected in 2025

The euro and government bonds extended gains after the announcement. The EUR climbed to a day high of $1.1846, while German 10-year yields held near a three-month low of -0.34%.

The ECB also unveiled an “action plan to include climate change considerations in its monetary policy strategy”, according to which the ECB will take greater account of climate change in its key monetary policy decisions. Detailing the results of a long-awaited strategic review, it said climate change would be a factor in ECB policy related to the disclosure of financial information, risk assessment, collateral and its corporate sector asset purchases.

“Looking ahead, the ECB will adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria, in line with its mandate,” said the interest rate-setting authority for the 19-member euro area.

“These will include the alignment of issuers with, at a minimum, EU legislation implementing the Paris agreement through climate change-related metrics or commitments of the issuers to such goals,” it added in a statement.

The move (seen as laughable by all market cynics as all the ECB is doing is vowing it will provide European governments with more debt monetization) makes the ECB one of the more “forward-leaning” in Reuters’ words monetary authorities on climate change. The Federal Reserve has acknowledged that it does have economic consequences but says it does not factor it into monetary policy decisions.

ECB President Christine Lagarde, who has spoken passionately about the need for climate action and has shared platforms with campaigners such as David Attenborough, has made it a priority of her first two years at the helm to establish the bank’s role in the field. While the ECB said governments and parliaments had “primary responsibility” to act on climate change, it recognised the need to do more within its own mandate due to the potentially huge financial implications both of disruption from extreme weather events and global efforts to cut carbon emissions.

Other ECB decisions announced on Thursday included:

• development of new models and analyses to monitor the implications of climate change and related policies
• development of new indicators, covering green financial instruments and the carbon footprint of financial institutions, as well as their exposures to climate-related risks
• a detailed plan from next year to require climate change-related disclosures for eligibility as collateral and asset purchases.
• climate stress tests in 2022 of the balance sheet of the Eurosystem, which comprises the ECB itself and the national central banks of the 19-member euro area.

Of course, the ECB’s climate fighting hypocrisy is not only laughable it’s redundant in a world where the biggest source of pollution is neither Europe nor the US but the developing world, and China in particular. But as we all know, China is untouchable because nobody dares to alienate 1 billion potential Chinese buyers by telling the truth. Instead, social justice warriors such as LeBron remain focused squarely on their own native lands, while the true source of most of the world’s ills remains untouched.