Learn from history?ECB changes strategy to avoid premature rate hike

Learn from history?ECB changes strategy to avoid premature rate hike


The last time the European Central Bank raised interest rates coincided with the Eurozone debt crisis Since 2011 -Its officials now admit that the move was a major mistake.

Its first New strategy The announcement on Thursday for nearly two decades is aimed at avoiding the risk of premature tightening of policies in the future. It converted the Frankfurt-based institution to a 2% inflation target and promised to tolerate any minor overshoots.

The President of the European Central Bank, Christine Lagarde, said in the introduction: “We have learned lessons from history, and we have observed what works and what does not work.” Review result“Now we need to prove that we mean what we say.”

For most of the past decade, the European Central Bank has been unable to raise the inflation rate to its previous target of “below but close to 2%.” Analysts said that the new strategy will make it easier to maintain interest rates at historically low levels for a longer period of time in order to achieve its statutory task of price stability.

Annalisa Piazza, an analyst at MFS Investment Management, said: “Lagarde is opening the door for further vigorous action.”

According to Carsten Brzeski, head of macro research at ING, this “obviously marks a trend toward more, even if it is subtle and dovish”.

By abandoning the previous inflation target, the European Central Bank aims to eliminate what Lagarde called the “baseless speculation” that it would rather inflation be lower than target rather than higher.

Although Lagarde stated that its new target is symmetrical, which means that it “sees that inflation is equally undesirable for negative and positive deviations from the target,” she added that in some cases it will not worry about inflation being higher than the target. .

She said that when interest rates are near their lower limit and inflation is still below its target, the European Central Bank will take “particularly strong or sustained monetary policy actions”-as it has been in the past few years. This shift “may also mean a transitional period when inflation is moderately higher than the target.”

This does not mean that it will actively seek to push inflation above its target, because the Fed has changed its strategy to compensate for the effects of periods of low inflation.Lagarde said that the ECB’s new strategy is “completely correct” different from Fed’s average inflation policy.

This makes the Fed’s position more accommodative than the European Central Bank. However, inflation in the United States is relatively high, and the Fed is expected to begin tightening policy sooner. The European Central Bank’s new strategy makes it more likely to keep interest rates low, which may push down the euro-dollar exchange rate and keep euro zone bond yields low.

Citigroup strategists said: “Historically, monetary policy differences between major central banks have led to increased foreign exchange volatility, currency appreciation, and monetary tightening policies”, it is expected that the euro against the euro may fall from more than 1.18 euros to 1.16 euros. US dollars.

The biggest question left by the ECB’s statement is what does this mean for its monetary policy as the Eurozone economy recovers from the coronavirus crisis — this is left out of discussion.

Gabriel Makhlouf, Governor of the Irish Central Bank and member of the Council of the European Central Bank, said: “We have made a very clear distinction between the strategic review work and the routine work of monetary policy operations.”

“We will discuss any impact on monetary policy at a regular meeting, and the next meeting will be held in two weeks,” Makhlouf said. “Of course, the issue that dominates our current discussion is the impact of the pandemic, and I expect this to continue in the short term.”

Some analysts pointed out that the change in the ECB’s inflation target was partially offset by its commitment to pay more attention to the cost of owning a home in the calculation of official price growth. Frederik Ducrozet, a strategist at Pictet Wealth Management, said that this will increase the headline inflation figure by about 15 basis points, which is expected to exceed 2% this year.

Others said that in the long run, the biggest impact of the ECB’s new strategy will come from measures aimed at climate change, although many measures will not fully take effect until 2024.

The central bank stated that it will develop a new financial impact model, stress test its own exposure to global warming, require companies to better disclose climate risks, and adjust corporate asset purchase and collateral policies to take into account the carbon emissions of securities issuers .

Paul Diggle, deputy chief economist at Aberdeen Standard Investments, said: “The review is groundbreaking in terms of climate change.” “Other central banks will read this article and think seriously about how they can behave similarly to green monetary policy. Promise of.”

When the European Central Bank Council met this week, most of the 25 members, including Lagarde, gave up watching the discussions of Italy against Spain in the European Football Championship semifinals.

Considering the disagreements of the committee when Lagarde succeeded Mario Draghi at the end of 2019, there are concerns that her decision to initiate a strategic review will exacerbate tensions.On the contrary, the agreement reached a few months in advance on the new strategy is the success of her self-proclaimed strategy. Team building, With the help of this week’s college party.

But the real test of the council’s unity is likely to come when it decides how to implement a new strategy, such as How quickly relax Its 185 million euro emergency bond purchase plan.

Krishna Guha, Vice President of Evercore ISI, said: “With this framework alone, the European Central Bank cannot afford it. “Only by firmly deploying tools to advance the set goals will it gain credibility. . “

Additional report by Eva Szalay in London

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