July 7, 2021

FRANKFURT (Reuters) – The European Central Bank will on Thursday announce the outcome of a 18-month strategy review, redefining its inflation target and laying down what role it plans to play in the fight against climate change.

The ECB’s first review since 2003 has been one of bank President Christine Lagarde’s priorities since she took over from Mario Draghi in late 2019, and the new strategy may herald the biggest transformation of a still relatively young institution.

In a move long flagged by policymakers, the bank is likely to set its inflation target at 2%, ditching its current formulation of “below but close to 2%”, which has created the impression it worried more about price growth above the target than below it.

The target is also likely to be declared symmetric. But after nearly a decade of undershooting it, investors will be watching for clues as to whether the ECB will be willing let inflation overshoot following bouts of low price growth.

They will also be looking to see if the ECB will follow its U.S. counterpart in targeting average inflation over a period to make up for lost price growth.

An explicit reference for tolerating an inflation overshoot is likely to be seen by investors as a commitment to keep monetary policy ultra-easy for an even longer period and would be seen as an assurance that 2% is not a cap, as now perceived.

But such a move could be politically risky, particularly among inflation-way Germans, and Bundesbank chief Jens Weidmann has long opposed it.

On climate change, the ECB looks almost certain to use its bank supervision arm to force companies to make greater climate-related disclosures.

Raising collateral requirements for polluting firms or skewing asset purchases around climate goals have also been on the table, but appear to be generating greater debate among the 25 members of the Governing Council.

The ECB will announce the results of the review at 1100 GMT, followed by a Lagarde news conference at 1230 GMT.

(Reporting by Balazs Koranyi; editing by Jonathan Oatis and John Stonestreet)