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Christine Lagarde, president of the European Central Bank (ECB), in January, 2020.DANIEL ROLAND/AFP/Getty Images

The European Central Bank has enhanced its role in tackling climate change and set a new goal for price stability that will allow inflation to run moderately above target after periods of slow consumer price growth, the bank’s most significant strategy overhaul in almost two decades.

The monetary authority for 19 euro zone countries will aim for 2-per-cent annual inflation on a “symmetric” basis, meaning it is equally concerned with overshoots and undershoots of the target, the ECB said Thursday.

The new target replaces the central bank’s old aim of “below, but close to, 2 per cent [inflation] over the medium term,” giving policy makers more flexibility to keep interest rates low as the European Union recovers from the pandemic-induced recession and the ECB looks to bolster the continental economy after a decade of sluggish growth.

The bank also committed to taking climate change into consideration when setting monetary policy. It will adjust its corporate bond purchases and collateral rules to favour issuers with robust climate-related disclosure and plans to expand its work on analyzing how climate change will affect the financial system.

“We are facing an issue – climate change – which is the major challenge that the world is facing,” ECB President Christine Lagarde said in an online news conference Thursday. “We are not the primary actors, we are not driving the bus, if you will. But we are on that bus, and we have to look at whether or not, under our mandate, [climate change] has an impact on price stability.”

Central bankers around the world are examining the effectiveness of monetary policy in the face of ultra-low interest rates, climate-related risks and a new emphasis on inequality and the relationship between monetary and fiscal policy.

Last summer, the U.S. Federal Reserve introduced an “average inflation targeting” approach, which explicitly aims for above-target inflation after periods of low price growth in an effort to expand labour force participation when the country is coming out of recessions.

The Bank of Canada is nearing the end of its own mandate review, which is expected to wrap up in the coming months. Canada’s central bank is weighing several different models, including average inflation targeting and a dual mandate, which would see the central bank target full employment alongside inflation.

The Bank of Canada has given few hints suggesting it will significantly change the way it approaches climate change. BoC Governor Tiff Macklem has argued that “there is a clear role for the Bank of Canada in climate change within our existing mandate” and has said that the central bank’s primary role is in helping private financial institutions assess climate-related risks.

It is currently working with the Office of the Superintendent of Financial Institutions and a group of Canadian banks and insurance companies to develop better tools to model how climate change and the transition to a low-carbon economy will affect Canada’s financial system.

The ECB’s new climate commitments “don’t meet what environmental groups have been asking for, but they are a significant step in the right direction,” said Alex Speers-Roesch of Greenpeace Canada.

“With both the ECB and Bank of England explicitly incorporating climate change into monetary policy, there’s increasing pressure on the Bank of Canada to follow suit and show it’s really committed to sustainable finance. The Bank is conducting important research to better understand climate risks, but it’s not enough to just study climate risks,” he said in an e-mail.

The ECB’s new inflation mandate does not go as far as the Federal Reserve’s in actually targeting an inflation overshoot after periods of low price growth. But the ECB will tolerate moderately above-target inflation and intends to respond with “especially forceful or persistent action” to prevent below-target inflation from becoming entrenched, Ms. Lagarde said.

Since the 2008 financial crisis and the European sovereign debt crisis that followed, the ECB has struggled to get inflation back to 2 per cent and has resorted to a range of unorthodox policies to try to stimulate growth, including asset purchases and negative interest rates.

The ECB’s explicit focus on a symmetric 2-per-cent target is intended to send a clear message that the central bank does not consider 2-per-cent inflation to be an upper limit. At the same time, Ms. Lagarde said the central bank was not “pushing out the potential tightening that will take place” by adopting the new rule.

“We don’t believe that the results of the review will change the ECB’s response function in any meaningful way,” Jacqui Douglas, chief European macro strategist with Toronto-Dominion Bank, wrote in a note to clients.

“And with no likely progress toward lifting inflation expectations, we think that it will still be a long slog to reach the inflation target.”