The European Central Bank set a new inflation target on Thursday after an 18-month strategy review, hoping to bolster its credibility after undershooting its current objective for nearly a decade.
It said it would also further incorporate climate change considerations into its monetary policy, the latest in a series of steps by the world’s top central banks to acknowledge their policy must take account of climate change
Below are some comments from investors and analysts on ECB’s strategy review announcement:
CHRISTOPH RIEGER, HEAD OF RATES & CREDIT RESEARCH, COMMERZBANK, FRANKFURT
“The inclination to tolerate higher inflation is deeply rooted in the ECB’s thinking. They are stressing the importance of having an inflation buffer.
“There is a justification for them to act forcefully against low-inflation risks that they see arise.
“Tying this with some of the other colour we’ve seen from the ECB of late underlines that it is determined to keep policy loose and allow inflation to establish itself at higher levels.
“The bottom line is that real yields have hit record lows and that will continue.”
MARCHEL ALEXANDROVICH, EUROPEAN FINANCIAL ECONOMIST, JEFFERIES, LONDON
“They are putting a lot of focus on greening of monetary policy, which we knew was coming.
“The symmetry point is something that Lagarde has been talking about for some time. All things being equal the new target allows the doves on the council to argue for the ECB continuing with easy monetary policy.
“The including of housing costs into the HICP index – the question for me is what kind of weight will that have. Potentially, this is an important move but it doesn’t look like it will have an imminent impact on policy.
“On corporate bonds QE, they will take into consideration companies’ approach to climate change. If there is corporate QE, some companies not making adjustments could potentially be excluded. There are lots of grey areas and we don’t have the details yet.”
COLIN ASHER, SENIOR ECONOMIST, MIZUHO, LONDON
“Clearly the ECB is moving in a sensible direction. In the past the ECB has tightened rates prematurely a couple of times and this means the risk of such a mistake in future is small. But while the ECB is moving in a dovish direction, it is being outpaced by the Fed which has already adopted a formal average inflation targeting framework and is actively trying to run the economy hot.”
STEFAN LEGGE, ECONOMIST, UNIVERSITY OF ST GALLEN
“The ECB’s announcement hardly comes as a surprise to me. It’s been clear for some time that higher inflation will not just be tolerated but aimed for. It is politically very tempting as the benefits come first and the (substantial) costs often a decade later.
“As usual, we have to be careful with the wording. First, while the methodology for measuring inflation will be updated it will likely still understate the price impact of loose monetary policy.
“Second, what the ECB (and the Fed) call ‘symmetric’ will likely be asymmetric: A period of undershooting 2% inflation will be used as justification for expansionary monetary policy, yet a period of overshooting 2% inflation is unlikely to be followed be a period of restrictive policy.
“Who expects the ECB to follow a restrictive policy in, say, 2024 or 2025 when inflation was above target in 2021-2023? Over what time frame should the average rate of inflation be calculated, what number of years constitutes the medium term?”
DIRK SCHUMACHER, HEAD OF EUROPEAN MACRO RESEARCH, NATIXIS
“The inflation target is the most interesting part of it.
“While a make-up strategy – to compensate when inflation undershoots or overshoots – has some theoretical allure, they are complicated and simulations from the Fed have shown they would not help that much.
“So in the end they decided not to go for it, which was to be expected.”
ARNE PETIMEZAS, ANALYST, AFS GROUP, AMSTERDAM
“You have to see this change mainly in the dots and commas… If they really want inflation, something in the political economy has to change. Think of a Volcker-esque figure who stirs things up. I do have some suggestions. That would mean that many parties would have to take actual losses on assets. I don’t see that happening. If there is any inflation at all, the ECB will probably shy away from it too.
“The climate aspect is nice. But as the Tinbergen rule states, a policy instrument for a policy objective. I wouldn’t look too much into that. It is just operational.”
IMA SAMMANI, FX MARKET ANALYST, MONEX EUROPE
“Today’s announcement by the ECB can be perceived as net dovish in the short-term by markets, as the new symmetric inflation target gives the central bank ample room to run accommodative monetary policy for longer without having to fight markets. Over time, the central bank will include owner-occupied costs in their inflation measure, which will allow them to raise inflation synthetically should the eurozone’s stubbornly low inflation rate fail to increase over the medium term.
“The extent to which housing is included in the inflation measure, both by weighting and composition, depends on the inflation trajectory over the medium-term and how achievable the path towards normalising policy is over the coming years.”