On Thursday 8 July, the Governing Council of the European Central Bank (ECB) unveiled its new monetary policy strategy, which includes a symmetrical inflation target of 2% and the integration of climate change considerations into all aspects of its price stability efforts.
This new strategy is the result of a reflection launched at the beginning of 2020, but disrupted by the Covid-19 pandemic. “We have worked within the existing treaty and taken the ECB’s primary mandate of price stability as a given”, said ECB President Christine Lagarde, who was satisfied with the outcome of the exercise, which challenged a way of thinking that had not changed since 2003.
In its statement, the ECB reaffirms that its primary objective remains price stability in the euro area and that, without prejudice to this objective, the Eurosystem supports the general economic policies in the European Union.
The Governing Council considers that targeting 2% inflation over the medium term is the best way to maintain price stability. Its commitment to this goal is symmetrical, i.e. positive or negative deviations from the goal are equally undesirable.
This symmetrical objective will allow the Frankfurt institute to take “forceful” action, Mrs Lagarde said. In line with the monetary policy already applied by the US Federal Reserve, the ECB is thus giving itself more room for manoeuvre to maintain very low key rates and massive asset purchases for longer, if the macroeconomic situation so requires.
Climate change at the heart of the concerns
Mrs Lagarde had already announced at her hearing before the European Parliament as candidate for the presidency of the monetary institute in September 2019 (see EUROPE 12320/4) that she wanted monetary policy to take more systematic account of the climate issue.
This has been achieved with this action plan and a detailed roadmap, even if, according to Greenpeace, awareness remains slow and late.
The Governing Council is committed to ensuring that the Eurosystem takes full account, in line with the EU’s climate objectives, of the impact of climate change and the transition to a low-carbon economy on monetary policy and central bank activities.
“We have acknowledged that climate change is an existential challenge for the world, and it is of strategic importance for the ECB’s mandate”, said Mrs Lagarde.
The monetary institute announced a series of measures, including: - the development of new models to study the implications of climate change for the economy and the financial system; - the development of new indicators on ‘green’ financial instruments, the carbon footprint of financial institutions, and their exposure to climate risks; - the submission of a detailed plan in 2022 setting out new reporting requirements (e.g. compliance with the Paris Agreement on Climate) as eligibility criteria for securities eligible for collateral and for asset purchases; - the organisation of climate stress tests to assess the exposure of the Eurosystem’s balance sheet to climate risks; - the review, in light of climate risks, of the risk assessment and control frameworks applicable to assets used as collateral by Eurosystem counterparties in credit operations; - the evolution of the framework governing the allocation of purchases of corporate securities held for monetary policy purposes (e.g. the ‘PEPP’ operation).
The new monetary policy strategy will be implemented at the next Governing Council meeting on Thursday 22 July. It will itself be reviewed in 2025.
See the statement on the monetary policy strategy: https://bit.ly/3qUjDvz
See the detailed roadmap on climate integration: https://bit.ly/3hqTod3 (Original version in French by Mathieu Bion)