FRANKFURT (Reuters) – European Central Bank policymakers meet in a Frankfurt hotel this weekend to kick-start an overarching strategy review that will redefine the bank’s targets and may set new ones in the areas of climate change and employment.

Following are the five key subject areas up for discussion in what will be rate-setters’ first face-to-face meeting in over a year. There is no media access.

The review, launched in early 2020, is expected to conclude in the second half of this year.

INFLATION TARGET

The current target of “below but close to 2%” is likely to get a facelift, but odds are against a full overhaul.

The problem with the current formulation is that the “below but close to” clause creates an impression that the ECB worries more about inflation above the target than below it.

This perceived asymmetry has hindered the ECB’s efforts to boost inflation over the past decade, despite massive money printing, with some investors doubting the central bank’s commitment or even ability to hit its goal.

So policymakers are likely to set the target at 2%, declare it to be symmetric, and express a tolerance for overshooting after period of undershooting.

The key debate will be whether to make up for lost inflation. The U.S. Federal Reserve has started to follow such an approach by targeting average inflation. But such a system is complicated to devise and communicate, some argue.

CLIMATE CHANGE

ECB President Christine Lagarde has made it abundantly clear that the bank must do its bit in tackling climate change, even if governments will still have to shoulder a bigger burden.

Using supervisory powers to force firms to make more climate-related disclosures seems uncontroversial. Indeed, the ECB has already told banks to carry out a self-assessment of their climate risk and it will also do a climate stress test in 2022.

Tailoring monetary policy is more controversial, however, even if opposition from conservative policymakers, such as Bundesbank President Jens Weidmann, is waning.

Options under consideration include skewing asset purchases to favour companies with a lower carbon footprint or towards those firms that are making an effort to reduce emissions.

The problem with such an approach is that bond buys are not a permanent tool so ECB help would only be temporary. Such tilting of purchases could also fuel asset bubbles.

Another option under consideration is limiting access to central bank funding for banks financing polluters. As banks sit on more than 2 trillion euros ($2.4 trillion) worth of ECB loans, raising collateral thresholds would make a quick impact.

MEASURE OF INFLATION

In a world of super-low interest rates, the price growth felt by households is higher than official measures because housing costs push up inflation.

Such costs are only included to a limited extent in current inflation measures. However, collecting timely data on owner-occupied housing costs has proven impossible for Eurostat, the EU’s statistics agency.

The ECB could look at alternative inflation measures and could even calculate its own inflation figures. But any such move would be controversial and appear like the bank is massaging numbers having failed to reach its objective.

Ultimately, the ECB is likely to stick to the current measures but keep pressure on Eurostat to improve inflation data.

PEPP

While the 1.85 trillion euro Pandemic Emergency Purchase Programme is not part of the review, it looms large over discussions.

PEPP is due to expire next March, so by this autumn the ECB needs to discuss whether to wind the scheme down and whether to tweak other tools to better suit a post-pandemic world.

But these decisions will affect policy for years to come, so making them before a review is concluded would appear self-defeating.

CHANGED WORLD?

The key economic rules that guided policy over decades – notably the Phillips Curve – do not seem to be working in the same way as prior to the 2008-2009 global financial crisis.

According to the curve, a drop in unemployment leads to higher wages and faster inflation. But wages and inflation hardly rose while the bloc enjoyed a solid economic run and unemployment fell before the pandemic.

This could lead the ECB to make policy moves less pre-emptive than in the past and follow the Fed in accepting lower unemployment levels with hotter jobs markets.

($1 = 0.8391 euros)

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