FRANKFORT, Germany — The European Central Bank has adopted a new approach to managing the economy that would allow the bank to tolerate transitory periods of inflation moderately above its 2% goal and to take greater account of climate change in its forecasting and stimulus programs.
The new strategy announced Thursday for the 19 countries that use the euro currency also recommends including house prices in the EU’s key measure of inflation.
A key aspect is replacing the bank’s previous inflation goal of “below but close to” 2% annual inflation. The new target is described as 2%, but “symmetric.” That means it would allow a “transitory period” of above-target inflation. In theory, that would allow the bank to maintain low interest rates and stimulus programs such as bond purchases with newly created money for a longer period of time.
The bank said that counting the rise in house prices would better represent inflation as it’s relevant to households. Including owner-occupied housing in the EU’s inflation index would take years, however; therefore the bank said it plans to use initial estimates of housing costs to supplement its inflation measures.
The bank said it would do more to take the impact of climate change into its monetary policy, saying that global warming could have “profound implications” for price stability. It said it would expand its economic models and statistics to better assess the effect that climate change could have on the economy.
When purchasing bonds, the bank said it could take into consideration whether the companies issuing those bonds were compliant with EU legislation implementing the 2015 Paris climate change accords. Buying corporate and government bonds is a tool the bank uses to drive down borrowing costs for businesses, households and government budgets.
The bank’s mandate established in the basic European Union treaty is to pursue price stability. Once that is achieved, it can pursue other goals consistent with the EU’s economic policies.
The bank said it would apply the new strategy starting with its next meeting on July 22.
