18.07.2021 – 13:06
For most of its 23 years, the European Central Bank (ECB) had a vague inflation target. “Below, but close, 2%”. No one knew exactly what it meant, but the consensus among economists was that the bank was targeting inflation in the region of 1.7-1.9%. In any case, low inflation stubbornly made the question almost academic. Average annual inflation in the euro area since 2013 has been just 0.9% compared to 1.9% in the US, although interest rates are below zero and the ecb has been raising government and corporate bonds for years in a bid to boost the economy.
The bank’s struggle to achieve its goal has spurred some research. Last year Christine Lagarde, its president, launched a review of its event development strategy “Listener” and jumped on academic papers. Its findings were announced on July 8. The Bank ultimately plans to incorporate the impact of climate change into its models and, potentially, to reflect climate considerations in its asset purchases. It also aims to pay attention to the cost of owning a home when studying inflation (in contrast to the practice in other rich countries, this is not included in the eurozone measure of consumer prices). And unveiled a new symmetrical inflation target of 2%.
Greater clarity about the target is welcome and can allay concerns that the ECB will raise interest rates before an economic recovery takes hold, as it did in 2008 and 2011. Ms. Lagarde noted on July 8 that the change gained support unanimity by the board of directors of the bank with 25 persons.
As a start, the strategy seems to mean different things to different evaluators. Jens Weidmann, head of the Bundesbank and a member of the ecb’s governing council, tried to show that although inflation could temporarily deviate from the target, the ecb would not aim to exceed it. This is in contrast to the US Federal Reserve, which also recently revised its target. It plans to target inflation of 2% on average, tolerating a period of overcoming in order to make up for past shortcomings. But Olli Rehn, the pigeon governor of the central bank of Finland, said on July 9 that he expected the ecb’s response to a shock to be quite similar to that of the Fed.
Differing views may explain why, although Ms. Lagarde promised that the bank’s next monetary policy meeting on July 22 would clarify what the new policy target means, few analysts expect major changes. (The ECB is currently buying € 80 billion, or $ 95 billion, in government and corporate bonds a month.) Economists at Barclays, a bank, say the review should have no effect on the short-term monetary policy path and that the ecb will continue support the euro area by buying bonds. Analysts at Morgan Stanley, another bank, predict that the ecb may bring a notice to drop the pandemic-related asset purchase scheme, but instead upgrade an old buyout program.
Without major changes, it is difficult to see how the ECB can do a better job of achieving its goal. In June, a number of economic forecasters, including those at the central bank, predicted that inflation would be in the region of 1.4-1.5% in 2023. If you are to successfully convince investors and households that it means business, then the bank will have to explain why, when he does not even expect to meet her old goal, he should suddenly be able to meet a new one.
Translated and adapted for Konica.al by The Economist