ECB includes house prices in inflation measure

Will wonders never cease. Via Goldman:

BOTTOM LINE: The Governing Council adopted a 2% inflation target in its strategy review and agreed that owner-occupied housing costs should be reflected in the HICP. Although the target is symmetric, the ECB signals tolerance to temporarily overshoot 2% inflation given the lower bound on interest rates, but does not call for make-up strategies. The strategy review included little news on the monetary policy instruments, stressing that policy rates remain the primary monetary policy instrument. The Governing Council agreed on a climate-related plan, incorporating climate factors in its monetary policy objective and adapting the design of its monetary policy operational framework.

MAIN POINTS:

1.On inflation measurement, the ECB confirmed that the HICP remains the appropriate price measure for the achievement of the price stability objective and agreed that owner-occupied housing costs should be reflected in the HICP. As the inclusion of owner-occupied housing will be a multi-year project, the GoverningCouncil will, in the meantime, take into account inflation measures that include initial estimates of housing costs when assessing inflation pressures in the Euro area.

2.On the inflation aim, the Governing Council adopted a 2% inflation target over the medium term, replacing the previous “below, but close to, 2%” formulation. The target is symmetric, meaning that negative and positive deviations from 2% are considered equally undesirable.

3. In achieving this target, the new ECB strategy signals tolerance for temporarily overshooting 2% inflation. The Governing Council recognizes that the effective lower bound on policy rates constrains the ECB’s ability to counter negative deviations from the inflation target. To guard against this risk “requires especially forceful or persistent monetary policy measures” during periods of undershooting, which “may also imply a transitory period in which inflation is moderately above target”. The new strategy therefore accommodates a higher risk of temporary overshooting the target, but does not call for make-up strategies. While today’s communication outlines the economic principles governing the new strategy, the forward guidance will be adjusted at the next policy meeting of the Governing Council on 22 July.

4. The strategy review included little news on the monetary policy instruments. The Governing Council stressed that policy rates remain the primary monetary policy instrument, but noted that it will continue to employ forward guidance, asset purchases and long-term financing operations, as appropriate. The conclusions of the strategy review do not comment specifically on the existing QE programmes (PEPP andAPP), but noted that the Governing Council will continue to respond flexibly to new challenges, signalling readiness to employ new instruments to achieve its price stabilitymandate.

5. The Governing Council concluded that climate change has profound implications for price stability through its impact on the economy and signalled commitment to support the EU’s climate goals and objectives with a climate-related plan. In addition to the incorporation of climate factors in its monetary policy objective, the Governing Council will adapt the design of its monetary policy operational framework with regard to disclosure, risk assessment, corporate sector purchases and the collateral framework.

In theory, this will lift interest rates much faster but we will have to wait and see what kind of weight house prices carry.

It is already happening in New Zealand.  Labor has mooted an RBA review which could include this as well.

Shame it also ready to sell us to China.

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