The recent strategy review by the European Central Bank has not just redefined its inflation objective, but has also adjusted the ways how the economic situation of the euro zone will be assessed in the future in order to take monetary policy decisions.
In general, monetary policy is described as actions taken by a central bank to adjust the level of aggregate demand and employment to steer the economy toward a predefined objective, mainly price stability, for example, an inflation rate of 2% in the euro zone.
So, this demand-side policy is supposed to have short-run effects on the business cycle of a country or of a geographical area like the euro zone.
The beforementioned strategy change by the ECB moves monetary policy from a short-run to a more long-run perspective by adjusting its analytical framework: more structural indicators will be considered for monetary policy decisions in the future.
One new aspect of the economic situation assessment is the roadmap presented by the ECB on how to achieve the integration of climate objectives into the monetary policy framework until 2024. The justification for this strategical change is that climate change will cause economic instability. This economic instability may then cause financial instability and will probably have impacts on price stability, the major objective of the ECB.
A particularly important consequence of this structural change is that climate objectives have become criteria for the ECB’s corporate sector asset purchases.
This shift may be considered as a shift toward a supply-side (monetary) policy, a policy that has an impact on the structure of supply in an economy. The consequence will be a change of the access to financial resources for non-financial firms, as loans given to climate-friendly firms will be more easily accepted as collateral by the ECB than loans given to polluting firms.
In general, the question to be addressed is if the ECB should take climate change explicitly into account when taking monetary policy decisions. A first answer is given by the ECB itself as you can read and hear in every statement that climate change will be taken into account for monetary policy decisions in line with the bank’s mandate.
A second answer to that question is given by the fact that, according to the Treaty of the European Union, the ECB “without prejudice to the price stability objective... shall support the general economic policies in the EU with a view to contributing to the achievement of the Union’s objectives as laid down in Article 3 of the Treaty on European Union.” In the meantime it has become quite clear that climate policies need to be a political priority so that the ECB cannot be criticised for this strategical adjustment.
In 2025, when a new ECB strategy review is expected, we will see how efficient these first adjustments have been.