The ECB school no longer exists

Last week the European Central Bank completed Strategic review Early, much less than the equivalent update of the Fed two years ago. But behind this sluggish acceptance is the significant normalization of Eurozone institutions.

In the words of Frederik Ducrozet, an observer of the European Central Bank of Baida, some financial sector analysts believe that “not much (has) changed”. Christine Lagarde, President of the European Central Bank, pleaded for a difference: She insisted at a press conference that the situation “has changed a lot”.

One can try to reconcile these views—observers who oppose Lagarde and her colleagues who think this is an important moment are overwhelmed—first notice that the review gets rid of many of the characteristics that make the ECB so different from other major central banks.

The “dual key” target of “close to but below” 2% inflation rate is gone forever, replaced by a clearly symmetrical 2% target. The “monetary pillar” of the European Central Bank’s analytical method is also gone, which pays particular attention to the money supply measures left over by the former Maastricht Federal Bank. (Of course, the money supply will still be monitored, but as part of a broader comprehensive analysis.)

The endorsement also made it clear that the unconventional tools used in the past decade will continue to exist and can be used as long as short-term interest rates are difficult to further reduce.

In short, the review removed many of the factors that made the European Central Bank stand out among central banks—especially those characteristics that contributed to the deflationary bias of Frankfurt-based institutions.This is not your parents’ ECB-from 18-page detailed description of the management committee How does it understand the role of economic and monetary policy.

The document definitely needs to be approved line by line, and in most cases can be issued by the Federal Reserve, the Bank of England, or the Bank of Japan. The analysis of the economy, price dynamics, and monetary mechanism is the same; there is no longer a separate European Central Bank school-focusing more on inflation than deflation, and tends to worry that intervening in the bond market is equivalent to funding the government. Everyone faces the same challenge, that is, the “normal” interest rate is always much lower than in the past and is close to the effective limit of how low it can be.

As Lagarde expressed, when the economy is under a negative shock, interest rates are already low and inflation expectations begin to fall, because people think that the central bank’s ammunition has been exhausted, so the challenge is to avoid falling into a “trap”. For some time, central bankers and economists all over the world have faced this challenge, and all the proposed solutions are variations of a theme.

Ben Bernanke, the former chairman of the Federal Reserve, came up with As long as the monetary policy interest rate is at the lowest level, the central bank can change from targeting inflation to targeting price levels. The Fed itself chose a different approach: targeting average inflation and worrying more about being below the target rather than being above it.

The European Central Bank took a different approach, emphasizing the symmetry of its goals, but announced the asymmetry of achieving the goal: In order to prevent inflation expectations from less than 2% when the policy interest rate is very low, Frankfurt promised to use other tools and persistence with greater force , Even if it means that the inflation rate exceeds 2% for a period of time.

No difference is not a complete difference. But the difference is small—at least in theory. Many people remain skeptical, including Ducrozet, who said he “has an uncomfortable feeling” that “the European Central Bank will continue to be seen as less aggressive and unreliable than the Fed”.

Maria Demertzis, deputy director of Bruegel, also said that the European Central Bank will more convincingly set a clear “tolerance range” to keep inflation away from the target to a certain extent. Arguing on Twitter.

So much depends on how Lagarde lets the European Central Bank’s new strategy inform her communication. In the past, she has been trying to convince the market. She can try again now—this time, it feels sensible.

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