The European Central Bank has a new approach to monetary policy
Frankfurt, Germany – The European Central Bank has adopted a new approach to managing the economy that allows the bank to endure a temporary period of inflation marginally above its 2% target and to take climate change into account in its forecast and stimulus programs. will allow.
The new strategy announced on Thursday for the 19 countries that use the euro currency also recommends the inclusion of house prices in the EU’s key measure of inflation.
A key factor is replacing the bank’s previous inflation target of “below but close” 2% annual inflation. The new target is described as 2%, but is “symmetrical”. This means it would allow for a “transient period” of target inflation above. In theory, this would allow the bank to maintain low interest rates and incentive programs such as bond purchases with newly created funds for a longer period.
The bank said calculating the increase in house prices would better represent inflation as it is relevant to households. However, it would take years for owner-occupied housing to be included in the EU inflation index; The bank therefore said it plans to use preliminary estimates of housing costs to supplement its inflation measures.
The bank said it would do more to take into account the impact of climate change in its monetary policy, adding that global warming could have “profound implications” for price stability. It said it would expand its economic models and data to better assess the impact of climate change on the economy.
When buying the bonds, the bank said it could consider whether the companies issuing those bonds were compliant with EU law implementing the 2015 Paris climate change agreement. Buying corporate and government bonds is a tool banks use to reduce borrowing costs for businesses, households and government budgets.
The mandate of the bank, established in the original EU treaty, is to advance price stability. Once this is achieved, it can pursue other goals in line with EU economic policies.
The bank said it would implement the new strategy starting from its next meeting on July 22.