The ECB will set a new inflation target of 2% that can be exceeded if necessary

The ECB will set a new inflation target of 2% that can be exceeded if necessary

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The ECB will set a new inflation target of 2% that can be exceeded if necessary

The response to the pandemic crisis has overturned another paradigm that seemed immovable. According to sources familiar with the matter cited by Bloomberg, the European Central Bank has decided to reformulate its inflation target. The goal of keeping it “below but close to 2%”, in force until now, will be transformed into a flexible 2%, which may be exceeded when necessary without necessarily entailing a reaction from the entity in the form of a rise in interest rates. interest or withdrawal of stimuli.

At first glance, the change may seem minor, but it goes far beyond the merely aesthetic: it represents a victory for the more moderate sector over the orthodoxy of the hawks – as those who hold the toughest positions are known – and opens the door to greater flexibility for the bank to deploy its anti-crisis artillery, whose maximum exponent is now the pandemic emergency purchase program (PEPP), with a total endowment of 1.85 billion euros until the end of March from 2022

The bank has not officially confirmed the measure, and the decision is expected to be formally announced this Thursday at one in the afternoon, when the conclusions of its Governing Council meeting, held this week to review the ECB’s strategy, should be known. for the first time since 2003, when the goal was adjusted from the founding “below 2%” to the usual “below, but close to 2%.”

Since her arrival in Frankfurt, Lagarde made it one of her goals to embark the agency on a top-down analysis of all its tools. “We are going to review a multitude of issues. How do we meet our objectives, how do we measure and what tools we have and how do we communicate ”, she assured in Frankfurt after her second meeting of the Governing Council as president of the institution. The idea was to take advantage of the atmosphere of relative calm to make a calm reflection and have the changes ready by the end of 2020, but the pandemic has disrupted all the variables that were handled then, when low inflation was one of the concerns, and has delayed.

The announcement occurs precisely when prices are now at 1.9%, fulfilling the eternal mandate of Frankfurt, although the comparison the data is conditioned by the situation of last year, when the restrictions caused the collapse of the economy, which it shifted to consumption and lowered inflation in an attempt by companies to attract customers.

Before the meeting this Thursday, the experts contemplated three scenarios: that the ECB did not make any changes, that a strict objective of 2% was set, or that that goal be established but with some flexibility, the option that has finally been imposed . The euro reacted to the news with slight falls after ten o’clock at night, and was changed by 1.18 dollars.

Among the most common criticisms of the maxim that so far governed the steps of the ECB was that its wording was too ambiguous, allowing staunch supporters of keeping inflation at bay to have arguments to demand rate hikes when the economy has not yet stopped. regained its cruising speed.

If the target change is confirmed on Thursday, the ECB would follow in the footsteps of the Federal Reserve (Fed), which in August announced that it was easing its 2% inflation target after 41 years of continuity, thus establishing a long era of low interest rates. interest to encourage growth and employment in the midst of the virus. Almost a year after that time, prices in the United States, which is in a more advanced stage of recovery than Europe, have reached 5% without the Fed having moved the price of money from its current level of 0%. , although it announced an advance at the end of 2023 of the first rate hike – initially planned for 2024.