Home WORLD-NEWS ECB to amend guidelines to reflect new 2% inflation target

ECB to amend guidelines to reflect new 2% inflation target

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Christine Lagarde, president of the European Central Bank (ECB), speaks about interest rate decisions during a livestream video of the central bank’s virtual press conference.

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The European Central Bank’s new inflation target and its possible effects on monetary policy will be the main topic of this week’s meeting in Frankfurt.

Hopes are high that the eurozone central bank will come in with a mild surprise as President Christine Lagarde continues to emphasize the need for strong policies to avoid anchoring inflation expectations.

“We recognize very specifically that the proximity of the effective lower bound requires strong or sustained monetary policy measures,” Lagarde said during a question-and-answer session at the presentation of the new strategy on July 8.

In fact, the ECB raised its inflation target from “below but close to 2%” to a symmetrical target of 2% over the medium term, meaning that both under and overshoot is allowed, but “not desirable”.

The United States Federal Reserve also announced last year that it would allow inflation to run higher than normal as a way to stimulate the labor market and economic recovery. In practice, this means that the central bank will be less likely to raise interest rates.

Since the eurozone financial crash, consumer price growth has averaged only 1.2%. In other words, despite all the extraordinary measures taken during the sovereign debt crisis, inflation has not reached the ECB’s target over the past ten years.

What does this mean for monetary policy? The jury isn’t here yet.

While some expect more this week than just adjustments to the ECB’s forward guidance, others expect a real turnaround later this year once there is more clarity about the region’s economic trajectory and the evolution of the coronavirus pandemic.

“We think last week’s comments from policymakers indicate that the ECB will go further than just changing forward guidance at its July 22 meeting,” said Luigi Speranza, chief economist at BNP Paribas, in a recent research paper.

“Our bias is to think that we will also gain more clarity on the post-PEPP environment, underscoring the ECB’s message of continued accommodation,” he said.

Others have more muted expectations.

“So the main message could be that there is no rush to signal a tighter policy even during the September/October meetings,” said Anatoli Annenkov of Societe Generale.

“We do not expect a better understanding of the possible end of the crisis phase of the pandemic until the end of this year, suggesting that the most important decisions about PEPP may not come until then,” he added.

The ECB proposed a contingency bond-buying program in March 2020 to deal with the economic shock of the pandemic. This program, known as the PEPP, will currently last until March 2022 and total up to 1.85 trillion euros ($2.2 trillion).

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