ECB adjusts inflation target to 2% in medium term

On July 8, the European Central Bank (ECB) decided on a new inflation target and agreed to include climate change in its monetary policy strategy.

This is the result of an 18-month policy review, marking the largest adjustment of goals and tools ever by Europe’s most powerful financial institution.

In its statement, the ECB said it had decided to raise its inflation target to 2% over the medium term, instead of the previous target of “below or close to 2%” – a target agreed in 2015. 2003 when rapidly rising prices caused many concerns.

The statement read: “The Board believes that price stability is best maintained by moving towards the 2% inflation target over the medium term” and there could be “a transition period in which inflation insignificantly exceeded the target”. Pursuing this inflation target allows inflation to rise above 2% “for a while” before the ECB raises interest rates to boost the labor market. Inflation in the EU has been low for many years, despite the region’s unprecedented deployment of economic stimulus measures. Therefore, many experts believe that this new inflation target, which they consider difficult to achieve, should be reconsidered.

In addition to deciding on a new inflation target, the ECB also said that in the future, the financial institution will consider companies’ compliance with regulations and environmental obligations when looking at whether assets are of the company is eligible for a mortgage or to be acquired by the ECB. The ECB will also begin conducting “climate tests” to assess the risk of the Eurosystem, the eurozone’s currency regulator, to the effects of climate change. climate.

“The Board recognizes that climate change has a profound impact on price stability and, therefore, has committed to implementing an ambitious climate-related action plan,” the statement said. “.

“The new strategy is a solid foundation that will guide us in conducting monetary policy in the years to come,” said ECB President Christine Lagarde. According to her, the Eurozone should set an inflation target “that the public can easily understand” and calculated based on people’s real daily life.

Meanwhile, analysts at Capital Economics called the inflation target adjustment a “historic shift for the ECB”.

Earlier, on July 7, the European Commission (EC) sharply raised its growth forecast for the Eurozone to 4.8% in 2021 and 4.5% in 2022, respectively, higher than 4.5%. 3% and 4.4% respectively released in May. In addition, the EC also raised the inflation forecast of 19 countries in the Eurozone, but said that consumer prices will increase more slowly. Specifically, Eurozone inflation could rise to 1.9% this year, up from 1.7% forecast in May. However, the EC also warned that inflation could be higher than expected. warning if supply constraints persist longer and price pressures push consumer prices higher.