ECB raises inflation target in major strategy revamp
The European Central Bank revised its inflation target higher on Thursday, in the largest revamp of its policy strategy since 2003.
Instead of aiming for consumer price inflation of close to but below 2.0% over the medium-term, it would now attempt to set policy so that prices rose by 2.0% over the medium-term.
Critically, that means that deviations in inflation below the ECB's target level will be addressed with the same vigour.
"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 prepared remarks.
"The new strategy is a strong foundation that will guide us in the conduct of monetary policy in the years to come."
Implicit in the new symmetric target for CPI prices were "moderate" overshoots of the target during "transitory periods".
Thursday's change was seen as an attempt by ECB policymakers to reduce the risk of premature policy tightening that might itself lead to deviations from the target.
Worth noting nevertheless, in her press conference, Lagarde explicitly said the ECB was not pursing so-called 'inflation targeting' like the US central bank did.
Yet as Claus Vistesen at Pantheon Macroeconomics pointed out, she went on to add that "forceful and persistent" action could imply inflation temporarily above target.
"Coupled with the statement that “the primary monetary policy instrument is the set of ECB policy rates” it is tempting to believe that a further deposit rate cut—in response to lower than desired inflation for a sustained period—is now more likely—to counter sustained low inflation—instead of more aggressive QE," Vistesen added.
"In practice, however, we continue to see no change in the deposit rate over the next 12 months, with the main policy decisions taking place in the pace and duration of the PEPP, and the handover to the APP."
The ECB also said that from now on its policy deliberations would take climate change-related effects into consideration.
For their part, analysts at Danske Bank said: "In that sense, the new symmetric ECB target is somewhat less aggressive than the Fed's AIT, by tolerating, rather than targeting an inflation overshoot. We do not expect the new symmetric inflation target formulation to have much implication for monetary policy in the short- to medium-term, explaining the muted market reaction to the announcement.
"For ECB the conundrum remains that underlying inflation pressures remain anchored at a too low level and without the support from other policy areas (namely fiscal policy), ECB will continue to face challenges in living up to its inflation target in our view."
Euro/dollar was 0.58% higher at 1.1858 as of 1503 BST in response to the strategy review.