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The ECB today announced its new inflation target well-known. Instead of aiming for inflation rates close to, but below, 2%, the central bank is moving to a symmetric target of 2%. This means that it will tolerate higher inflation from now on, provided it remains around the 2% target in the long term. This will give the central bank more room to continue its accommodative monetary policy for longer.
This adjustment to the inflation target is part of a strategic review of the central bank's monetary policy. The last time this happened was in 2003, when the monetary and financial landscape looked very different than it does today. At that time, the eurozone did not have negative interest rates and the purchase of government bonds was only done in Japan. Interest rates have been at zero for years and the balance sheet total has risen to almost €8 trillion.
The ECB has come under further pressure in recent months due to rising inflation. This threatened to go above the 2% inflation target, but the central bank thought it was too early to tighten monetary policy. That is why she decided to review her mandate last year. The result of this evaluation is an expansion of the inflation target, which means that the asset purchase programme does not yet have to be phased out.
This new inflation target reaffirms that monetary stability takes precedence over price stability. High inflation is therefore no longer a problem, to the extent that the central bank can influence it at all. It means that the ECB can keep its interest rates low for longer, which is unfavorable for savers. Nowadays, they have to deal with negative interest rates above a certain limit, at most banks €100,000.
Another outcome of the strategic review is that the central bank wants to include the housing costs of owner-occupied households in the inflation calculations. This would make it possible to Harmonised Index of Consumer Prices (HICP), more in line with actual inflation. According to the ECB, this is a trajectory of several years, but until then, the central bank wants to pay more attention to inflation calculations that do include housing costs.
It is striking that the ECB also pays attention to climate policy in its strategy review. About that Writes they do the following:
"Addressing climate change is a global challenge and a priority in EU policy. Within its mandate, the Governing Council should ensure that the Eurosystem takes into account the effects of climate change on monetary policy in line with the EU's climate goals."
This can be reflected in, for example, the bond-buying programme. The central bank may decide to buy more green-labeled bonds and fewer or no bonds from polluting companies that would contribute to climate change. In doing so, the central bank is giving a more political interpretation to its mandate.
This is a significant adjustment in monetary policy, because it abandons the principle of market neutrality. In the past, the ECB mirrored the market with its bond-buying programme. This means that the bonds on the central bank's balance sheet had the same composition as in the market.
This principle was abandoned at the beginning of the corona crisis with the launch of the Pandemic Emergency Purchase Programme (PEPP). Under this bond-buying program, the central bank can buy more bonds from specific countries as it sees fit. In practice, this meant that the ECB was able to buy proportionately more government bonds of the southern countries.
The outcome of this strategic review by the central bank is that it will continue to pursue an accommodative monetary policy in the coming years. This is very unfavourable for savers. The central bank's climate target is also distancing itself from its principle of market neutrality. This means that monetary policy will have more political colour. The ECB insists that price stability is its primary objective, but the monetary policy review shows otherwise. Savers have been warned.
This contribution comes from Geotrendlines
