Fra ABN-Amro:
ECB Watch – ECB raises inflation goal and signals overshoot strategy
The Governing Council has published the results of its Strategy Review. We are still going through the details, so we will set out a preliminary reaction here, focusing on the changes to its inflation goal and monetary policy strategy. We will revert with a more comprehensive view later in the day, including the climate change action plan.
The ECB has raised its inflation target to 2% from ‘below, but close to, 2%’ previously. The ECB notes that ‘price stability is best maintained by aiming for two per cent inflation over the medium term. The Governing Council’s commitment to this target is symmetric. Symmetry means that the Governing Council considers negative and positive deviations from this target as equally undesirable’.
In addition, the ECB has stated that it is prepared to allow periods of inflation overshooting the goal in circumstances where interest rates are close to the lower bound (as they are now) to preventing the disanchoring of inflation expectations. It notes that ‘when the economy is close to the lower bound, this requires especially forceful or persistent monetary policy measures to avoid negative deviations from the inflation target becoming entrenched. This may also imply a transitory period in which inflation is moderately above target’.
Third, the ECB confirms that HICP is the appropriate measure of inflation to assess ‘the achievement of the price stability objective’. However, the Governing Council would ideally like to see the inclusion of the costs related to owner-occupied housing (OOH) in the HICP over the coming years. In the meantime, the Governing Council will ‘take into account inflation measures that include initial estimates of the cost of owner-occupied housing in its wider set of supplementary inflation indicators’. In earlier comments, the ECB has suggested that the inclusion of OOH into HICP would add 0.2-0.3% to the inflation rate.
Overall, we think the changes put in place following the review imply an even longer period of accommodative monetary policy. This is because the gap, between where the ECB wants inflation to be over the medium term and where it is projecting that it will be, is now larger. In addition, given we are very close to the lower bound in interest rates and inflation expectations are historically low, the ECB has signalled its willingness to see a moderate overshoot of inflation in order to re-anchor inflation expectations. The consideration of OOH in its inflation assessment only partially offsets the other elements in terms of the monetary policy direction.
