ECB Unveils Policy Regime Change That Lets Inflation Overshoot
Comment of the Day

July 08 2021

Commentary by Eoin Treacy

ECB Unveils Policy Regime Change That Lets Inflation Overshoot

This article from Bloomberg may be of interest to subscribers. Here is a section:

“The new formulation removes any possible ambiguity and resolutely conveys that 2% is not a ceiling,” President Christine Lagarde told reporters in a press conference, adding that the strategy review was agreed unanimously. “What we want to do is to avoid the negative deviation that will entrench inflation expectations.”

The outcome “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.”

Still, the euro gained after the announcement as traders perceived the ECB’s new strategy as less aggressive than the Federal Reserve’s flexible inflation targeting. The common currency was up 0.5% at $1.1848 at 2:42 p.m. Frankfurt time. It’s fallen from around $1.22 a month ago.

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.

Eoin Treacy's view

The big question for any central bank is how to do control inflationary expectations? In many cases the simple answer has been to change how they measure it.

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