ECB tweaks inflation target, bolsters climate role

FRANKFURT — The European Central Bank set a new inflation target on Thursday and carved out a major role in the fight against climate change, as Europe’s most powerful financial institution embarked on the biggest overhaul in its 23-year history.

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 fundamental 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 two per cent in the medium term, ditching a previous formulation of “below but close to two per cent”, which had created the impression it worried more about price growth above the target than below it.

“We know that two per cent is not going to be constantly on target, there might be some moderate, temporary deviation in either direction of that two per cent. And that is OK,” Lagarde told a news conference to present the review.

“Are we doing average inflation-targeting like the (U.S.) Fed? The answer is: No, very squarely,” she said of the policy of allowing overshooting to maintain a target average rate.

ING economists said the move meant the ECB was “structurally more dovish” but noted this was a gradual evolution of a target that started at “below two per cent “before its most recent formulation.