By Balazs Koranyi
FRANKFURT (Reuters) – Policymakers at the European Central Bank are meeting at a Frankfurt hotel this weekend to kick off an overall strategy review that will redefine the bank’s goals and may set new ones in the areas of climate change and employment.
Below are the five key subject areas that will be discussed in what will be the rate setters’ first face-to-face meeting in more than a year. There is no access to the media.
The review, launched in early 2020, is expected to conclude in the second half of this year.
The current target of “below but close to 2%” is likely to be improved, but the odds are against a full revision.
The problem with the current formulation is that the “below but close to” clause creates the impression that the ECB cares more about inflation above the target than below it.
This perceived asymmetry has hampered the ECB’s efforts to boost inflation over the past decade, despite the massive money printing, and some investors doubt the central bank’s commitment or even its ability to hit its target.
Therefore, policymakers are likely to set the target at 2%, declare it symmetric, and express tolerance for excess after a period of non-compliance.
The key debate will be whether to make up for lost inflation. The US Federal Reserve has begun to follow this approach by targeting average inflation. But such a system is complicated to devise and communicate, some argue.
The president of the ECB, Christine Lagarde, has made it very clear that the bank must do its bit to tackle climate change, even if governments will still have to bear a greater burden.
The use of supervisory powers to force companies to make more climate-related disclosures seems indisputable. In fact, the ECB has already told banks to conduct a self-assessment of their climate risk and will also conduct a climate stress test in 2022.
However, tailoring monetary policy is more controversial, even if opposition from conservative politicians such as Bundesbank President Jens Weidmann is waning.
Options being considered include skewing asset purchases to favor companies with a lower carbon footprint or those companies that are making an effort to reduce emissions.
The problem with this approach is that bond purchases are not a permanent tool, so the ECB’s help would only be temporary. This buying bias could also fuel asset bubbles.
Another option being considered is limiting access to central bank financing for banks that finance polluters. Given that banks have loans from the ECB worth more than 2 trillion euros ($ 2.4 trillion), raising the guarantee thresholds would have a quick impact.
In a world of super-low interest rates, the growth in prices felt by households is higher than that of official measures because housing costs drive up inflation.
These costs are only included to a limited extent in current inflation measures. However, collecting timely data on the costs of owner-occupied dwellings has proven impossible for Eurostat, the EU statistical agency.
The ECB could consider alternative inflation measures and could even calculate its own inflation figures. But any such move would be controversial and it would appear that the bank is manipulating numbers without having achieved its goal.
Ultimately, the ECB is likely to stick to current measures, but maintain pressure on Eurostat to improve inflation data.
Although the Emergency Purchase Program for a 1.85 Trillion Euro Pandemic is not part of the review, it is at the fore in the discussions.
The PEPP will expire next March, so this fall the ECB must discuss whether to close the scheme and whether to adjust other tools to better adapt to a post-pandemic world.
But these decisions will affect politics for years to come, so making them before a review is complete would seem counterproductive.
The key economic rules that guided policy for decades, in particular the Phillips Curve, do not appear to be working in the same way as before the global financial crisis of 2008-2009.
According to the curve, a fall in unemployment leads to higher wages and faster inflation. But wages and inflation barely increased as the bloc enjoyed a strong economic streak and unemployment fell before the pandemic.
This could lead the ECB to take less preventive policy measures than in the past and follow the Fed in accepting lower unemployment levels with hotter labor markets.
($ 1 = 0.8391 euros)