European Central Bank To Unveil New Inflation Target

The European Central Bank (ECB) is expected to unveil a new inflation target today (July 8) and outline the role it will play in the fight against climate change.

The central bank's first strategic review since 2003 has been one of ECB President Christine Lagarde's priorities since she took over the top job at the central bank in late 2019.

The ECB is likely to set its inflation target at 2%, ditching its current formula of "below but close to 2%," which has been criticized by some people as being confusing and creating the impression the central bank worried more about price growth above the inflation target than below it.

The target is also likely to be declared symmetric. But after nearly a decade of undershooting its current goal, investors will be watching for clues to whether the ECB will be willing to let inflation overshoot following bouts of low price growth.

The ECB is also expected to follow the U.S. Federal Reserve in targeting average inflation over a period to make up for lost price growth.

An explicit reference for tolerating an inflation overshoot is likely to be seen by investors as a commitment to keep monetary policy ultra-easy for an even longer period of time.

On climate change, the ECB looks almost certain to use its bank supervision arm to force companies to make greater climate-related disclosures.

Raising collateral requirements for polluting firms or skewing asset purchases around climate goals have long been discussed at the ECB, but appear to now be generating greater debate among the 25 members of the central bank’s Governing Council.