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 2% in the medium term, ditching a previous formulation for "below but close to 2%", which had created the impression it worried more about price growth above the target than below it.
In perhaps the biggest change, the central bank said it will do more to help the fight against climate change and will include climate change considerations in monetary policy operations in the areas of disclosure, risk assessment, collateral framework and corporate sector asset purchases.
"The ECB will adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria, in line with its mandate," it said.
The bank will also start disclosing climate-related information of its corporate sector asset purchase programme by the first quarter of 2023, it added. Taking on a climate role, the ECB follows the U.S. Federal Reserve in a foray into social policy. The Fed after its own similar review last year said it would allow the jobs market to run hotter in the future to help low-income families, possibly tempering inequality.