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January 26, 2020

A changing climate: ECB gears up for new missions


January 26, 2020

Frankfurt: The European Central Bank this week officially kicked off a year-long "strategic review", the first rethink of its tools and goals in 16 years.

ECB chief Christine Lagarde has promised not to leave "any stone unturned" in the wide-ranging exercise, which could lead to a new inflation target or "greener" investments to help tackle climate change.

At the heart of the review will be the debate about whether to redefine the ECB´s main mandate of ensuring price stability.

Since 2003, the Frankfurt institution has targeted an inflation rate of "just below, but close to" two percent -- seen as most favourable to investment and employment.

But inflation has remained stubbornly low at around one percent despite years of easy-money policies, a phenomenon that has left many economists scratching their heads. Different theories have been put forward as to a possible explanation, from the rise of the casual "gig" economy to political shocks such as trade tensions and Brexit.

Analysts believe the ECB could decide to simply target an inflation of "around" two percent. Such "symmetry" in the inflation target could mean the bank would not immediately hit the brakes once inflation approaches two percent, potentially allowing it to overshoot a bit.

Lagarde has repeatedly stressed the urgency of tackling climate change and said the review would look closely at the role the ECB can play.

But in its statement announcing the review, the ECB only made passing mention of "environmental sustainability" being part of the discussions.

The prospect of integrating environmental concerns into monetary policy

has run into opposition from critics like German central bank chief Jens Weidmann.

They argue that climate-focused measures could distract from the bank´s main mandate, and are best left to governments. But Lagarde warned against "the danger of doing nothing".

She hinted that the bank could look at "greening" investments in the wider economy through its massive bond-buying scheme.

ECB staffers could also be tasked with making sure that "climate risk is embedded in the work that they do, risk assessment, models, forecasts". Analysts say the ECB could also consider offering preferential lending conditions to banks who stop funding fossil fuel projects.

The ECB said it would study the "potential side effects" of the monetary policy tools deployed over the past decade. Critics, led by Germany, have long complained that the ECB´s historically low interest rates -- designed to encourage lending and investment -- are hurting savers and squeezing banks´ profitability.

Some also fear the low rates could fuel asset bubbles in equities, housing and real estate. And retail banks are increasingly passing on negative rates to their customers -- meaning they have to pay to park their cash there.

The ECB confirmed it would do some soul-searching on the way it communicates with the outside world. ECB meetings are currently shrouded in more secrecy than those of other central banks.

An "account" of the governing council´s decision-making is published weeks after their meeting, that neither names participants nor reveals their voting record -- prompting calls for more transparency. Lagarde has also promised to "dust off" the bank´s famously jargon-heavy language to help citizens understand "what the ECB is for".

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