Tue, December 07, 2021

business

ECB unveils higher inflation goal that tolerates overshoot


The European Central Bank raised its inflation goal and said it is willing to tolerate a limited overshoot of the target, the outcome of a strategy revamp aimed at bolstering the economy after years of lackluster prices and growth.

In the culmination of an 18-month review published Thursday, policymakers agreed to seek consumer-price growth of 2% over the medium-term with a "symmetric" aim that could "imply a transitory period in which inflation is moderately above target."

That's a significant change from the "below, but close to, 2% over the medium term" wording which some monetary officials felt was too vague and led to calls for tighter policy too soon.

The euro and government bonds extended gains after the announcement. The common currency climbed to a day high of $1.1846, while German 10-year yields held near a three-month low of -0.34%.

The announcement "can be perceived as net dovish in the short-term," said Ima Sammani, FX Market Analyst at Monex Europe. "The new symmetric inflation target gives the central bank ample room to run accommodative monetary policy for longer without having to fight markets."

On climate change, another controversial topic for some central bankers, the institution said it will now include considerations on that matter in its monetary policy operations. Meanwhile officials also said they will start considering owner-occupied housing costs in their supplementary measures of inflation.

"While taking the ECB's primary mandate of price stability as a given, the review has allowed us to challenge our thinking, engage with numerous stakeholders, reflect, discuss and reach common ground on how to adapt our strategy," ECB President Christine Lagarde said in a statement. "The new strategy is a strong foundation that will guide us in the conduct of monetary policy in the years to come."

The strategy review is the first by the Frankfurt-based institution since 2003, and the most comprehensive and ambitious attempt to rethink its role in serving the euro zone's 342 million citizens since the creation of the single currency.

The ECB's revamped mission follows a similar effort by the Federal Reserve to question its approach to the economic challenges of the 21st century after years of elusive attempts throughout the advanced world to sustainably revive consumer prices.

The outcome also reflects a grand bargain among policymakers that gives Lagarde a chance to draw a line on divisions on the Governing Council over how far the central bank should go in supporting the economy.

Officials from Germany in particular found that the stance of her predecessor, Mario Draghi, represented a bias toward easy money that undermined the postwar inflation-fighting steadfastness of the Bundesbank on which the ECB was modeled as a condition for the country's participation in the euro.

Policymakers studied a wide range of economic trends and tools to understand why they've struggled to boost inflation despite negative interest rates and trillions of euros of monetary stimulus.

"The big question is really now, how do you follow this up?," said Anatoli Annenkov, an economist at Societe Generale. "Does it mean that they'll be more aggressive in easing, which I think is difficult. We're looking at a more delayed reaction function as inflation raises to the target. that should imply a very dovish ECB going forward."

Published : July 09, 2021

By : Syndication Washington Post, Bloomberg · Carolynn Look, Jeannette Neumann