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The ECB changes its inflation target, leaving more room to keep rates low

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The European Central Bank has set a new inflation target of 2 percent and said it will temporarily tolerate exceeding this when necessary, in a move that gives policymakers more flexibility to keep rates up. interest in historical lows for longer.

The change, which was announced Thursday as part of the Frankfurt institution first review of its strategy since 2003, it marks an important break with the conservative monetary doctrine of the German Bundesbank that formed the basis for the creation of the euro.

The central bank too announced plans to address the risks of climate change by tilting its purchases of goods and collateral rules away from heavy carbon-emitting companies that are not aligned with EU climate targets. He addressed rising house prices calling for the cost of owning a home to be reflected in how inflation is calculated.

Christine Lagarde, President of the ECB, said: “The new strategy is a strong foundation that will guide us in the conduct of monetary policy in the years to come.”

ECB policymakers decided to revisit their strategy shortly after Lagarde took over the leadership of Mario Draghi as president in November 2019. While the process has been delayed by the coronavirus pandemic, the results have been announced two months earlier than expected.

After years of failing to raise inflation to its target, the ECB abandoned its target of “close, but below, 2 percent,” which policymakers concluded was too opaque and implied a limit for rising prices.

The central bank said its new 2 per cent target was symmetrical, “meaning that negative and positive deviations of inflation from the target are equally undesirable”. The new goal is a medium-term goal with flexibility to fluctuate in any direction in the short term.

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“When the economy operates close to the lower limit of nominal interest rates, it requires particularly strong or persistent monetary policy action to avoid negative deviations from the target inflation target,” the ECB said. “This may also imply a transitional period in which inflation is moderately above target.”

Andrew Kenningham, economist at Capital Economics, said that even if “the immediate implication [for the path of monetary policy] are modest, ”the decision was still“ a historic change for the ECB ”and“ the death movement for the Bundesbank tradition, which has always emphasized the risks of high inflation above all else ”.

However, the ECB did not go as far as the US Federal Reserve, which last year formally committed itself to a flexible medium-term inflation target which means it aims to raise prices to overcome the its goal to compensate for a period of running under it.

Some analysts expected the ECB to also announce changes to its asset purchase program to avoid hitting self-imposed limits on the amount of sovereign debt it can hold. But that was left to a separate decision on how to liquidate its crisis-fighting policy measures later this year.


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