The key change to the guidance means that even if inflation is at the target at the end of the ECB’s three-year forecast horizon, officials won’t be forced to respond with tighter policy. The ECB currently foresees price growth averaging just 1.4% in 2023, which suggests any rate hike is years away.
Markets were little changed, with only around 5 basis points of hikes priced in by mid-2023 and about 10 basis points a year later.
The ECB’s promise of continued ultra-loose policy sets it apart from some of the world’s biggest central banks. In the U.S., where inflation is running above 5%, Federal Reserve officials are already discussing when to start tapering their stimulus. Some policy makers at the Bank of England have said a reduction in bond buying should be considered soon.
When the ECB was originally conceived the framers were primarily concerned with containing inflation because that was the direction all their personal experience pointed them in. They never considered deflationary forces would consume most discussions after the first decade of the currency’s existence. Unfavourable demographics, the aftershocks from the sovereign wealth crisis and now the hit from the pandemic mean the inflation mandate is not nearly as relevant as it was twenty years ago.Click HERE to subscribe to Fuller Treacy Money Back to top