July 09, 2021 | 13:58
ECB: Thou Shalt Be Flexible and Symmetric
It was time. The ECB has a new inflation target. After an 18-month review of all its strategies and tools, it was decided unanimously that “price stability is best maintained by aiming for a 2% inflation target over the medium term”. No more “below, but close to, 2%”, which was vague and subject to a lot of misinterpretation. Now, it is clear. The inflation target is 2%, full stop.
At the same time, the ECB will be flexible. After all, inflation will never simply land on 2% and stay there. It will stray from the target from time to time, and that is fine. The ECB will tolerate some “moderate, temporary deviations” on either side of 2% as long as the deviations are not prolonged and/or significant. So 2% is not a ceiling, as President Lagarde pointed out during the press conference. To make that stance official, it was stated that “the Governing Council’s commitment to the target is symmetric”, meaning that both “negative and positive deviations of inflation from the target are equally undesirable”. (Side note: Does anyone remember that the Federal Reserve used “symmetric” back in May 2018, to describe its then-inflation objective?).
The increasingly important issue of climate change was also brought into the world of monetary policy. The ECB’s corporate bond purchases will begin to include criteria on climate change, with disclosures needed to determine eligibility.
Bottom Line: Flexibility is probably the key word to describe the ECB’s new inflation target. It gives the central bank flexibility, clearly, to hold back its ammo if inflation rises to 2.1% or 2.2%, or thereabouts. Or if it slows to, say, 1.7%. Just throwing some random figures out there. As long as the overshoot or undershoot does not persist and is not wildly off the mark, the ECB will stay put for some time.