AXA IM: ECB moves to a symmetric definition of price stability

July 9, 2021

Gilles Moëc, Group Chief Economist at AXA Investment Managers, comments on the latest ECB monetary policy meeting:

The ECB has just released the conclusions of its strategy review. The fact that they were able to come to a decision in July already – instead of the widely expected September – sends a positive message on the level of consensus at the Governing Council (Christine Lagarde specified the text had been accepted unanimously), but (and probably precisely because it was consensual) the new strategy remains quite vague.

As widely expected for a long time, the ECB moves to a symmetric definition of price stability: 2% in the medium term, with deviations above and below “equally undesirable”. This comes with the acceptance that when policy rates are close to the lower bound, it “may also imply a transitory period in which inflation is moderately above target”. This is finally putting the ECB’s official stance in line with what Mario Draghi had been saying repeatedly in the last 2 years of his tenure. Note that this is less forceful than the Fed’s approach, which explicitly “aims at” an overshooting, in consideration of past sub-par inflation. In the ECB’s formulation, the Governing Council will still have to make a decision if and when inflation overshoots. It is a possibility, not an intention. Forward guidance is thus less strong.

The ECB will take into account owner-occupied housing costs in the measure of consumer price inflation.  Eurostat won’t be in position to provide complete data on this before several years, but the central bank will use preliminary data in the meantime. This will align their practice on the Fed’s, but the timing is interesting. This change could lift core inflation by up to 0.2%. Given the current trend in house prices, this will thus help them reach 2% - and potentially overshooting. This is probably a concession to the hawks against their acceptance of “exploring the possibility” of overshooting.

The ECB also unveiled its climate change strategy. The biggest move there is going to be the introduction of a “climate change risk” in the ECB’s collateral framework. The wording is vague here but if that means modulating the haircuts according to the carbon footprint, or on the ratings thresholds for eligibility, the ECB could set the tone for the entire European financial system’s pricing of the carbon risk. Now, the ECB made it plain that they – just like the other asset owners – are dependent on the availability of non-financial disclosures and the final definition and enforcement of the EU regulations. Implementation of these new collateral rules will thus probably have to wait until 2023-2024.