Inflation Effect of the ECB’s Change of Strategy Disputed Among Financial Experts


A ZEW study asked financial market experts about the ECB’s new strategy.

Financial experts are divided over the new strategy of the European Central Bank (ECB). While 49 per cent of those surveyed by ZEW Mannheim say that the change in strategy has prompted them to adjust their medium-term inflation forecast for the years 2021 to 2023 upwards, another 46 per cent say that the new strategy has no influence on their forecast. Five per cent are even inclined to revise their inflation forecast downwards.

On 8 July 2021, the ECB announced its new monetary policy strategy. It contains three central elements: the adoption of a symmetric inflation target, the inclusion of owner-occupied housing in inflation measurement and the consideration of climate protection in monetary policy. There is greater consensus among the financial experts, however, on the assessment of the climate protection mandate that the ECB has committed itself to with the new strategy. Two-thirds of the respondents doubt that the ECB – contrary to the target formulated in the strategy – will make a successful contribution to EU climate policy by reducing CO2 emissions. On the contrary, the consideration of climate aspects makes it more difficult to achieve the new symmetric inflation target and to justify ECB decisions to the public. These are the results of the ZEW Financial Market Survey in August 2021, in which 147 financial market experts were asked about the new ECB strategy.

Inflation could rise in the medium term, key interest rate could increase only slightly

There is still a great deal of uncertainty among financial market experts about how the change to a symmetrical inflation target will affect inflation and key interest rates in the medium term. Accordingly, both upward and downward deviations of the inflation rate from the target value of two per cent are still considered equally unfavourable. Only about 55 per cent of the respondents answered the question of how the change to a symmetric inflation target has affected their inflation forecasts. They estimate that the new ECB strategy will lead to an increase in the inflation rate in the euro area for the years 2021-2023 by an average of just under 0.4 percentage points, respectively.

When asked about how the new strategy will influence the key interest rate, around 48 per cent of the financial market experts answered. According to their estimates, over the next six and 24 months the ECB’s main refinancing rate will rise by an average of 0.1 percentage points, respectively. “The financial market experts expect the key interest rate to rise significantly less than the inflation rate due to the new ECB strategy,” explains Frank Brückbauer, researcher in ZEW’s “International Finance and Financial Management” Department and co-author of the ZEW Financial Market Survey. “In sum, respondents expect the switch to a symmetric inflation target of two per cent to have a small, negative effect on real interest rates in the euro area.”

Home ownership expected to lift measured consumer prices slightly

A clear majority of financial market experts see the inclusion of owner-occupied housing in consumer price measurement as a moderate inflation driver in the future. Around 70 per cent of the respondents assume that the change in the composition of the Harmonised Index of Consumer Prices (HICP) will slightly increase measured inflation. Another 11 per cent of the experts even expect a significant increase in the measure of consumer prices. While about 14 per cent of the respondents estimate that the change will have no influence on the HICP, six per cent forecast a slight or significant decrease.

Consideration of climate protection could jeopardise inflation target

The ECB also aims to take greater account of climate protection aspects in its monetary policy in future. About 51 per cent of the respondents think that this will make it more difficult to achieve the inflation target of two per cent. Around 43 per cent do not expect any significant change.

“Combining monetary policy with climate protection allows for better risk management and thus responds to the current market situation. But mixing different policy objectives could make it more difficult for the ECB to justify its decisions,” says Dr. Michael Schröder, researcher in ZEW’s “International Finance and Financial Management” Department and co-author of the ZEW Financial Market Survey. Approximately 44 per cent of the financial experts surveyed suspect that the ECB’s communication could lose transparency due to climate considerations. However, a slight majority of around 47 per cent believe that the ECB will be able to cope well with this task. A further 9.1 per cent of respondents even expect transparency in communication to increase if the ECB officially takes climate protection into account.

New ECB strategy does little to reduce CO2 emissions

However, the majority of respondents doubt whether the ECB can actually contribute to EU climate protection. “It is surprising that two-thirds of the respondents do not trust the ECB to promote EU climate protection,” Schröder continues. However, 29 per cent of the financial experts estimate that the ECB will succeed in supporting the EU in its climate policy. “Overall, the widely diverging answers in our survey show that uncertainty in the market regarding the effects of the ECB’s change in strategy is currently still high."