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European Central Bank (ECB)

ECB must tighten policy if needed to counter inflation, Weidmann says

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The headquarter of the European Central Bank (ECB) is photographed during sunset, as the spread of the coronavirus disease (COVID-19) continues in Frankfurt, Germany, April 28, 2020.   REUTERS/Kai Pfaffenbach

The headquarter of the European Central Bank (ECB) is photographed during sunset, as the spread of the coronavirus disease (COVID-19) continues in Frankfurt, Germany, April 28, 2020. REUTERS/Kai Pfaffenbach

The European Central Bank must tighten monetary policy if it needs to counter inflationary pressures and cannot be put off from doing so by the financing costs of eurozone states, ECB policymaker Jens Weidmann (pictured) told the Welt am Sonntag newspaper, writes Paul Carrel, Reuters.

Eurozone countries have ramped up their borrowing to cope with the coronavirus pandemic, potentially leaving them exposed to increased debt servicing costs if the central bank tightens policy to counter upward pressure on prices.

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"The ECB is not there to take care of the solvency protection of the states," said Weidmann, whose role as president of Germany's Bundesbank gives him a seat on the ECB's policymaking Governing Council.

Should the inflation outlook rise sustainably, the ECB would have to act in line with its price stability objective, Weidmann said. "We have to make it clear again and again that we will tighten monetary policy if the price outlook calls for it.

"We cannot then take into account the financing costs of the states," he added.

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After its July 22 policy meeting, the ECB pledged to keep interest rates at record lows for even longer to boost sluggish inflation, and warned that the rapidly spreading Delta variant of the coronavirus posed a risk to the eurozone's recovery. Read more.

"I do not rule out higher inflation rates," the paper quoted Weidmann as saying. "In any case, I will insist on keeping a close eye on the risk of an excessively high inflation rate and not only on the risk of an excessively low inflation rate."

The euro zone economy grew faster than expected in the second quarter, pulling out of a pandemic-induced recession, while the easing of coronavirus curbs also helped inflation shoot past the ECB's 2% target in July, hitting 2.2%. Read more.

When the ECB decides it is time to tighten policy, Weidmann expected the central bank would first end its PEPP emergency bond purchase programme before scaling back its APP purchase plan.

"The sequence would then be: first we end the PEPP, then the APP is scaled back, and then we can raise interest rates," he said.

Digital economy

Digital euro: Commission welcomes the launch of the digital euro project by the ECB

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The Commission welcomes the decision taken by the Governing Council of the European Central Bank (ECB) to launch the digital euro project and start its investigation phase. This phase will look at various design options, user requirements and at how financial intermediaries could provide services building on a digital euro. The digital euro, a digital form of central bank money, would offer greater choice to consumers and businesses in situations where physical cash cannot be used. It would support a well-integrated payments sector to respond to new payment needs in Europe.

Taking into account digitalisation, rapid changes in the payments landscape and the emergence of crypto-assets, the digital euro would be a complement to cash, which should remain widely available and useable. It would support a number of policy objectives set out in the Commission's wider digital finance and retail payments strategies including the digitalisation of the European economy, increase the international role of the euro and support the EU's open strategic autonomy. Based on the technical co-operation with the ECB initiated in January, the Commission will continue to work closely with the ECB and the EU institutions throughout the investigation phase in analysing and testing the various design options in view of policy objectives.

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European Central Bank (ECB)

ECB to change policy guidance at next meeting, Lagarde says

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The European Central Bank will change its guidance on the next policy steps at its next meeting to reflect its new strategy and show it is serious about reviving inflation, ECB President Christine Lagarde said in an interview aired on Monday (12 July), writes Francesco Canepa, Reuters.

Announced last week, the ECB's new strategy allows it to tolerate inflation higher than its 2% goal when rates are near rock bottom, such as now.

This is meant to reassure investors that policy won't be tightened prematurely and boost their expectations about future price growth, which has lagged below the ECB's target for most of the past decade.

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"Given the persistence that we need to demonstrate to deliver on our commitment, forward guidance will certaintly be revisited," Lagarde told Bloomberg TV.

The ECB's current guidance says it will buy bonds for as long as necessary and keep interest rates at their current, record-low levels until it has seen the inflation outlook "robustly converge" to its goal.

Lagarde did not elaborate on how that message might change, simply saying the ECB's aim will be to keep credit easy.

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"My sense is that we will continue to be determined by maintaining favourable financing conditions in our economy," she said.

She added this was not the right time to talk about dialing back stimulus and that the ECB's Pandemic Emergency Purchase Programme, which is worth up to 1.85 trillion euros, could "transition into a new format" after March 2022, its earliest possible end-date.

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Economy

ECB presents action plan to include climate change considerations in its monetary policy strategy

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The governing council of the European Central Bank (ECB) has decided on a comprehensive action plan, with an ambitious roadmap (see annex) to further incorporate climate change considerations into its policy framework. With this decision, the Governing Council underlines its commitment to more systematically reflect environmental sustainability considerations in its monetary policy. The decision follows the conclusion of the strategy review of 2020-21, in which the reflections on climate change and environmental sustainability were of central importance.

Addressing climate change is a global challenge and a policy priority for the European Union. While governments and parliaments have the primary responsibility to act on climate change, within its mandate, the ECB recognises the need to further incorporate climate considerations into its policy framework. Climate change and the transition towards a more sustainable economy affect the outlook for price stability through their impact on macroeconomic indicators such as inflation, output, employment, interest rates, investment and productivity; financial stability; and the transmission of monetary policy. Moreover, climate change and the carbon transition affect the value and the risk profile of the assets held on the Eurosystem’s balance sheet, potentially leading to an undesirable accumulation of climate-related financial risks.

With this action plan, the ECB will increase its contribution to addressing climate change, in line with its obligations under the EU Treaties. The action plan comprises measures that strengthen and broaden ongoing initiatives by the Eurosystem to better account for climate change considerations with the aim of preparing the ground for changes to the monetary policy implementation framework. The design of these measures will be consistent with the price stability objective and should take into account the implications of climate change for an efficient allocation of resources. The recently established ECB climate change centre will coordinate the relevant activities within the ECB, in close cooperation with the Eurosystem. These activities will focus on the following areas:

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Macroeconomic modelling and assessment of implications for monetary policy transmission. The ECB will accelerate the development of new models and will conduct theoretical and empirical analyses to monitor the implications of climate change and related policies for the economy, the financial system and the transmission of monetary policy through financial markets and the banking system to households and firms.

Statistical data for climate change risk analyses. The ECB will develop new experimental indicators, covering relevant green financial instruments and the carbon footprint of financial institutions, as well as their exposures to climate-related physical risks. This will be followed by step-by-step enhancements of such indicators, starting in 2022, also in line with progress on the EU policies and initiatives in the field of environmental sustainability disclosure and reporting.

Disclosures as a requirement for eligibility as collateral and asset purchases. The ECB will introduce disclosure requirements for private sector assets as a new eligibility criterion or as a basis for a differentiated treatment for collateral and asset purchases. Such requirements will take into account EU policies and initiatives in the field of environmental sustainability disclosure and reporting and will promote more consistent disclosure practices in the market, while maintaining proportionality through adjusted requirements for small and medium-sized enterprises. The ECB will announce a detailed plan in 2022.

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Enhancement of risk assessment capabilities. The ECB will start conducting climate stress tests of the Eurosystem balance sheet in 2022 to assess the Eurosystem’s risk exposure to climate change, leveraging on the methodology of the ECB’s economy-wide climate stress test. Furthermore, the ECB will assess whether the credit rating agencies accepted by the Eurosystem Credit Assessment Framework have disclosed the necessary information to understand how they incorporate climate change risks into their credit ratings. In addition, the ECB will consider developing minimum standards for the incorporation of climate change risks into its internal ratings.

Collateral framework. The ECB will consider relevant climate change risks when reviewing the valuation and risk control frameworks for assets mobilised as collateral by counterparties for Eurosystem credit operations. This will ensure that they reflect all relevant risks, including those arising from climate change. In addition, the ECB will continue to monitor structural market developments in sustainability products and stands ready to support innovation in the area of sustainable finance within the scope of its mandate, as exemplified by its decision to accept sustainability-linked bonds as collateral (see press release of 22 September 2020).

Corporate sector asset purchases. The ECB has already started to take relevant climate change risks into account in its due diligence procedures for its corporate sector asset purchases in its monetary policy portfolios. Looking ahead, the ECB will adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria, in line with its mandate. These will include the alignment of issuers with, at a minimum, EU legislation implementing the Paris agreement through climate change-related metrics or commitments of the issuers to such goals. Furthermore, the ECB will start disclosing climate-related information of the corporate sector purchase programme (CSPP) by the first quarter of 2023 (complementing the disclosures on the non-monetary policy portfolios; see press release of 4 February 2021).

The implementation of the action plan will be in line with progress on the EU policies and initiatives in the field of environmental sustainability disclosure and reporting, including the Corporate Sustainability Reporting Directive, the Taxonomy Regulation and the Regulation on sustainability-related disclosures in the financial services sector.

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