The European Central Bank has embarked on the path of renewal this Thursday, ending 18 years of continuity in its strategy to achieve price stability. After two major crises in just over a decade – one financial and the other health – that have tested its ability to keep the euro zone afloat, a complex field of operations made up of nineteen countries with often conflicting interests, The entity has come to the conclusion, after a long reflection that has lasted a year and a half, that the best way to fulfill its mandate is to make its inflation target more flexible, so it has decided to raise its goal to 2% in the medium term , leaving room to exceed that threshold “during a transitory period.” Thus, it leaves behind its intention of placing it “below, but close to 2%”, which has been in force until now.
The new “symmetry” that Frankfurt wants to implement “means that positive or negative deviations from that objective are just as unwanted,” according to the statement issued this Thursday by the entity. In addition, the bank recommends that housing be included in the CPI in the coming years because “it would better represent the relevant inflation for households.” And it is committed to “including considerations on climate change in monetary policy operations”, a way of saying that they will avoid, in their asset purchases, the most polluting companies. To justify it, it alleges that climate change may affect the value and risk profile of assets on its balance sheet, “which could lead to an undesirable accumulation of financial risks related to the climate.”
The change of course in the inflation target, after years with unusually low rates, suggests that the ECB is more afraid of hindering the economic recovery than of a prolonged rebound in prices, just the opposite of what the former president is accused of Jean-Claude Trichet, who in 2008 raised interest rates shortly before the bankruptcy of Lehman Brothers and in 2011 did the same without the financial upheavals having ended.
The measure will complicate the most orthodox sectors – the so-called hawks, supporters of the easy trigger when it comes to raising interest rates— exert pressure when prices are above the target, a scenario that is already taking place in the United States and is very likely to carry over to Europe in the short term – although the ECB and the Federal Reserve believe this is a temporary phenomenon – with the recovery gaining traction, savings unraveling, supply chains under pressure from high demand, and fiscal and monetary stimulus flowing through the recovery plan. European Union and the ECB’s pandemic emergency purchasing program (PEPP), endowed with 1.85 trillion euros until March 2022.
But the consequences go much further. For Ignacio de la Torre, chief economist at Arcano, the paradigm shift supposes an oxygen balloon for the most indebted states. “When you have a lot of public debt over GDP, as is now the case in Western countries – with a debt of 124% compared to 122% at the end of World War II – the only way to reduce it is to raise nominal GDP more quickly than As the debt rises, in this way the denominator rises and the quotient goes down, even though the debt is the same. This is how all wars have been paid, and this is how the covid will be paid ”, he predicts.
Although the United States carried out a similar revision of its own target last year, announcing the Fed that it would tolerate “moderately higher” inflation for a time to ensure that the average is as close to the 2% figure as possible, Nicolas Veron, an economist at Bruegel and the Peterson Institute, believes that in Europe it will not be so easy to find the right pace. “The risk of having divergent economic, financial and inflation cycles in the member states is greater in the eurozone than in the US.”
In her little more than a year and a half at the head of the ECB, Christine Lagarde initially followed in the footsteps of Mario Draghi, whose first decision as president was to lower rates, a declaration of intent for the long period of cheap money that was coming. The turnaround overturned the bank’s more German tradition, sometimes more concerned with the concern of German car manufacturers about salary increases than of Spanish or Portuguese with variable-rate mortgages. But now, he wants to make his own mark with the strategic review undertaken by the Governing Council.
The great concern to come is called tapering –the term which refers to the gradual withdrawal of stimuli – a step that, if not done with subtlety, can lead to a rise in risk premiums, and therefore, in the financing costs of States.