European Central Bank tweaks inflation target, bolsters climate role

The European Central Bank set a new inflation target on Thursday and carved out a major role in the fight against climate change, embarking on a fundamental transformation of Europe’s most powerful financial institution.

With inflation having undershot its target for nearly a decade, ECB President Christine Lagarde has driven an 18-month deep dive into the inner workings of the bank, challenging even core principles of central banking in the hopes of resetting strategy and bolstering credibility.

In the key conclusion of the review, the central bank of the 19 countries that share the euro set its inflation target at 2 per cent in the medium term, ditching a previous formulation of “below but close to 2 per cent”, which had created the impression it worried more about price growth above the target than below it.

“We believe the 2 per cent target is clearer, simpler to communicate and a good balance,” Lagarde told a news conference. "We know that 2 per cent is not going to be constantly on target, there might be some moderate, temporary deviation in either direction of that 2 per cent. And that is OK."

But Lagarde stopped short of advocating a deliberate overshoot after periods of low inflation like the past decade and flat out rejected that the ECB would seek to make up for lost inflation the same way the US Federal Reserve is doing.

"Are we doing average inflation-targeting like the Fed? The answer is: No, very squarely," she said of the US central bank’s policy of allowing overshooting to maintain a target average rate.