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ECB policymakers locked in talks to finalise strategic overhaul

The European Central Bank’s policymakers are locked in talks to agree its first new strategy for almost two decades which could be announced as early as Thursday and is likely to amend its inflation target and address climate change and housing costs.

The 25 members of its governing council are meeting on Wednesday in Frankfurt in an attempt to finalise the results of the 19-month-long review, according to two people involved in the discussions. It was not due to be announced until September but after policymakers reached agreement on some matters, ECB president Christine Lagarde is seeking to complete the talks.

Two members of the council told the Financial Times they were hopeful a formal decision could be made on Wednesday, after good progress over dinner on Tuesday night.

If a deal is reached, Lagarde could present the outcome in an online press conference on Thursday, those with knowledge of the talks said. The ECB declined to comment.

The strategy review is likely to result in significant changes to the ECB’s operations.

The most fundamental shift is likely to be how it defines its core mandate of “price stability”. After years of failing to lift inflation up to its objective, the ECB is expected to ditch its target of “close to, but below, 2 per cent”, which is considered too opaque and implies a cap on price growth. 

There is widespread support on the council for a more straightforward 2 per cent target. The central bank is likely to emphasise that its new target is symmetric, so policymakers will be as concerned about exceeding it as being below it. The target will be a medium-term objective with flexibility to fluctuate in either direction in the short term.

However. the ECB is unlikely to go as far as the US Federal Reserve, which has formally committed to letting inflation exceed its target to make up for a period of low price growth. 

Jacob Nell, head of European economics at Morgan Stanley, said he expected the change would have only “a modest impact on the monetary policy stance in the short term” as the central bank had already implicitly embraced the strategy.

But he said other expected changes would have “profound consequences over a longer time horizon”. 

Since she took over from Mario Draghi in November 2019, Lagarde has urged the ECB to address growing public and political concern about climate change; the idea is expected to be a key part of the new strategy after early opposition from other council members faded.

The central bank is expected to announce plans for a green shift in its monetary policy by tilting its asset purchase portfolio and collateral rules away from companies with high carbon emissions that do not have a plan to meet the EU target to be net zero by 2050.

The change is likely to be phased in over several years as it will require greater disclosure by companies and the establishment of the EU’s green classification system for investors, which will set out what areas are climate-friendly.

The central bank will also address public concerns that monetary policy does not take enough account of rising housing costs, by pushing the EU’s statistical body Eurostat to add housing to its inflation calculation.

House prices are rising in much of Europe and this change would add an estimated 20 basis points to the current rate of inflation, according to recent ECB research. At other times, it would reduce the overall pace of price growth.


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