The European Central Bank changes its inflation target, leaving extra room for maintaining low interest rates

The European Central Bank changes its inflation target, leaving extra room for maintaining low interest rates


The European Central Bank has set itself a new 2% inflation target and stated that it will temporarily tolerate exceeding this target when needed. This shift allows policymakers more flexibility to maintain interest rates at historically low levels for longer periods of time.

The change announced on Thursday is part of the Frankfurt-based institution First review of its strategy Since 2003, this marked a major breakthrough with the conservative monetary doctrine of the German Bundesbank, which formed the cornerstone of the creation of the euro.

The central bank also Announce The plan is to respond to climate change risks by tilting its asset purchase and mortgage rules from heavy-duty carbon emission companies that do not meet EU climate targets.It solved Soaring house prices By calling for the cost of owning a house to be reflected in the calculation of inflation.

Christine Lagarde, President of the European Central Bank, said: “The new strategy is a solid foundation that will guide us in the implementation of monetary policy in the coming years.”

Soon after Lagarde succeeded Draghi as president in November 2019, European Central Bank policymakers decided to re-examine its strategy. Although this process was delayed due to the coronavirus pandemic, the results were announced two months earlier than expected.

After years of failing to raise inflation to its target, the European Central Bank abandoned its “close to but below 2%” target, which policy makers considered too opaque and implied a cap on price growth.

The central bank stated that its new 2% target is symmetric, “which means that the negative and positive deviations of inflation from the target are equally undesirable.” The new target is a medium-term target, which can flexibly fluctuate in either direction in the short term.

The European Central Bank said: “When the economy is running close to the lower limit of nominal interest rates, it needs particularly strong or sustained monetary policy actions to avoid negative deviations from the inflation target becoming entrenched.” “This may also mean that inflation is moderately higher than the target. Transition period.”

Capital Economics economist Andrew Kenningham said that although “a direct impact [for the path of monetary policy] It is moderate”, the decision remains “a historical change of the European Central Bank” and “the death knell of the Bundesbank tradition, which has always emphasized the risk of high inflation above all else”.

However, the European Central Bank did not go as far as the Fed. The Fed officially promised a flexible average inflation target last year, which means that it will work to increase price growth beyond its target to make up for a period of time below that target.

Some analysts expect that the European Central Bank will also announce adjustments to its asset purchase plan to avoid reaching its own limit on the amount of sovereign debt it can own. But this has been left to a separate decision later this year on how to gradually reduce its policy measures to respond to the crisis.

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