European Central Bank shifts inflation target upwards to 2%
The European Central Bank (ECB) has overhauled its rulebook to allow for the expansion of its unprecedented stimulus programme in a direct rebuff to German politicians concerned that printing billions of extra euros this year will spark an inflationary spiral.
After an 18-month review, the central bank for the 19-member eurozone said it would shift its inflation target from “below but close to 2%” to a 2% target it said was easier to communicate to financial markets and the public.
In a sign of the pressure on central banks to play a major role in combating climate change, the ECB also signalled it would use its influence as a major lender to only support companies through its bond-buying programme that commit to reducing carbon emissions.
The ECB president, Christine Lagarde, said the new strategy was simpler to communicate and “a strong foundation that will guide us in the conduct of monetary policy in the years to come”.
She denied the central bank was “moving the goalposts as prices begin to rise”, saying the review was started long before the recent recovery and strong increase in inflation.
She added that ECB council members always considered the inflation target to be “very close to 2%” and the change was only modest.
In recent months inflation in the eurozone has jumped to 2% fuelling concerns that after more than a decade languishing below 1% prices have begun to increase uncontrollably.
In a statement, the ECB governing council said: “When the economy is operating close to [zero] interest rates, it requires especially forceful or persistent monetary policy action to avoid negative deviations from the inflation target becoming entrenched. This may also imply a transitory period in which inflation is moderately above target.”
Some German politicians have said they are concerned the ECB’s injection of €4tn into the eurozone economy under its policy of quantitative easing will heap further pressure on prices. German inflation increased to 2.55% in May.
Only last month the head of the German central bank, Jens Weidmann, who is also an ECB policymaker, called on the ECB to rein in its stimulus programme, saying “inflation is not dead”.
However, eurozone inflation is expected to have fallen back in June when figures are released later this month as labour shortages and holdups in the supply of raw materials begin to ease. The spread of the Delta variant across much of the world is also expected to depress domestic demand and overseas trade, further easing pressure on prices.
The Bank of England already has a 2% target that allows its nine-strong monetary policy committee to “see through” periods when inflation undershoots or overshoots the 2% target.