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FOR MORE of its 23 years of existence the European Central Bank (BCE) had a fuzzy inflation target of “less than but close to 2%”. No one knew exactly what this meant, but the consensus among economists was that the bank was aiming for inflation in the range of 1.7 to 1.9%. In any case, the stubbornly low inflation made the question almost academic. Average annual inflation in the euro area since 2013 has been only 0.9% compared to 1.9% in America, even though interest rates are below zero and the BCE sucked government and corporate bonds for years in an attempt to revive the economy.
The bank’s struggle to achieve its goal has sparked introspection. Last year, Christine Lagarde, its president, launched a review of its strategy, which organized “listening” events and looked at academic articles. Its findings were announced on July 8. The bank plans to eventually integrate the impact of climate change into its models and potentially take climate considerations into account in its asset purchases. He also intends to pay attention to the cost of owning a home when studying inflation (unlike the practice in other rich countries, this is not included in the measure of consumer prices in the country. eurozone). And he unveiled a new symmetrical inflation target of 2%.
The greater clarity around the target is welcome and could allay fears that the BCE will raise interest rates before an economic recovery takes hold, as was the case in 2008 and 2011. Ms Lagarde noted on July 8 that the change had unanimous support from the 25 members of the board. administration of the bank. But understand what this means for the BCEThe monetary policy of the may prove to be more controversial.
For starters, the strategy seems to mean different things to different lawmakers. Jens Weidmann, the warmongering leader of the Bundesbank and member of the BCEof the Governing Council, was careful to point out that although inflation may temporarily deviate from the target, the BCE would not aim to exceed it. This contrasts with the US Federal Reserve, which also recently revised its target. It plans to aim for inflation of 2% on average, tolerating a period of overrun in order to make up for past deficits. But Olli Rehn, the dove governor of Finland’s central bank, said on July 9 that he expected BCEThe Fed’s response to a shock is quite similar to that of the Fed.
The different views could explain why, although Ms Lagarde has promised that the bank’s next monetary policy meeting on July 22 will clarify what the new target means for policy, few analysts expect big changes. . (The BCE is currently buying 80 billion euros, or $ 95 billion, in government and corporate bonds per month.) Economists at Barclays, a bank, believe the revision should have no effect on the short trajectory. term of monetary policy, and that the BCE would continue to support the euro zone by buying bonds. Analysts at Morgan Stanley, another bank, predict that the BCE could make an announcement to phase out its pandemic-related asset purchase program, but instead bolster an older purchase program.
Without great changes, it is difficult to see how the BCE can do a better job of hitting its target. In June, a series of economic forecasters, including those at the central bank, predicted inflation in the range of 1.4 to 1.5% in 2023. If it is to succeed in convincing investors and households that it is Seriously, then the bank will have to explain why, when it doesn’t even expect to reach its old goal, it should suddenly be able to reach the new one. ■
This article appeared in the Finance & Economics section of the print edition under the title “Promesses, promesses”
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