ECB to be less rigid on inflation

ECB president Christine Lagarde presented the ECB's strategic review. (Photo: Shutterstock)

ECB president Christine Lagarde presented the ECB's strategic review. (Photo: Shutterstock)

The European Central Bank has unveiled its strategic review, which began in January 2020. It will be a little more lax on the 2% inflation rate, which remains its primary objective.

When she took office as President of the European Central Bank in December 2019, Christine Lagarde announced that she wanted to carry out a "strategic review”, an exercise that had not been carried out since 2003.

And despite the health crisis that began to rage shortly after her announcement, the ECB has stuck to its guns. On  Thursday 8 July, it set out its new objectives, much to the surprise of everyone.

Its first mission being to ensure price stability, it is quite logically at the level of the inflation rate that the Frankfurt institution has modified the cursor.

The objective is still set around 2% inflation, which seems to be the best point of balance. However, it is the notion of "close to, but below 2%" that has been sacrificed in the new strategy.

From now on, the ECB will aim for 2% inflation "in the medium term". This means that it will tolerate temporary overshooting of this 2% threshold.

In line with the FED

This change is in line with the policy of the US Fed, which also decided in autumn 2020 to target an average inflation rate of 2%. In its case, the aim is to ensure that periods of low inflation can be offset by others with rates of price increases above this 2% level.

The French ECB president, who also promised that the institution would use a vocabulary that would be more understandable to the average citizen, also has ambitions with regard to global warming.

She explained that climate risks could have implications for price stability. In particular, it promises to integrate criteria linked to the climate strategies implemented in its corporate bond buybacks.

Details on how these new objectives will be put into practice will be unveiled  at the next governors' meeting on 22 July.