Bundesbank President Jens Weidmann believes the new strategy will help monetary policy maintain price stability for the people of the euro area. “A medium-term inflation rate of 2 per cent is a clear and easily understandable objective. We are not striving for either lower or higher rates. That was important to me,” was how Mr Weidmann assessed the outcome of the strategy review launched in January 2020 by the Governing Council of the ECB.

New inflation target: a core element of the strategy

On Thursday, the European Central Bank (ECB) unveiled the new monetary policy strategy of its Governing Council. The new inflation target is a core element of the strategy. Going forward, the Governing Council will be aiming for an inflation rate of 2% over the medium term. Its previous objective had been to keep inflation “below, but close to, 2 per cent” over the medium term. In a press release, the ECB explained that the new target should be understood as a “symmetric” objective, meaning that “negative and positive deviations ... from the target are equally undesirable”, adding that the “two per cent inflation target provides a clear anchor for inflation expectations, which is essential for maintaining price stability.”

Mr Weidmann said that temporary deviations from the target in either direction could occur. “However, we do not make our monetary policy contingent on targets not met in the past: our strategy remains forward-looking and takes into consideration the new challenge of the effective lower bound.”

Costs of owner-occupied housing should be included

The Governing Council will continue to use the Harmonised Index of Consumer Prices (HICP) as the appropriate price measure for assessing the achievement of the price stability objective. However, it advocates including the costs of owner-occupied housing in the HICP. According to the ECB press release, this “would better represent the inflation relevant for households.” The Bundesbank President welcomed this decision, noting that it “aligns price measurement even more closely, on average, with people's real-life circumstances.”

Incorporate effects of climate change

According to the ECB's monetary policy strategy statement, “Within its mandate, the Governing Council is committed to ensuring that the Eurosystem fully takes into account, in line with the EU’s climate goals and objectives, the implications of climate change and the carbon transition for monetary policy and central banking.” The Governing Council has accordingly committed to an ambitious clime-related action plan in which, in addition to the comprehensive incorporation of climate factors in its monetary policy assessments, it will adapt the design of its monetary policy operational framework in relation to disclosures, risk assessment, corporate sector asset purchases and the collateral framework.

“Going forward, climate change and climate protection will play a significant role in how we fulfil our mandate,” Mr Weidmann said. “We are expanding our analytical capacities – but not just that. It is correct for us to take, in particular, the financial risks deriving from climate change and climate policy as a starting point, to call for the disclosure of the necessary information, and to improve our risk management framework.”

Improved communication

The Governing Council of the ECB adopted a raft of additional changes. One is that it will adapt the communication of monetary policy decisions through the Monetary Policy Statement, the press conference, the Economic Bulletin and the monetary policy accounts to reflect the revised monetary policy strategy. The ECB added that these products would be “complemented by layered and visualised versions of monetary policy communication geared towards the wider public”. It also intends to seek more regular interaction with the general public, such as the listening events held during the current strategy review. The Governing Council also intends to “assess periodically the appropriateness of its monetary policy strategy, with the next assessment expected in 2025.”