The ECB’s New Inflation Goal Is Just That – A Goal, Nothing More

The ECB’s New Inflation Goal Is Just That – A Goal, Nothing More

By Bloomberg reporter and macro commentator Ven Ram.

The European Central Bank’s revamp of its strategy may allow for inflation pricing to creep up to new heights — though in and of itself it is unlikely to be the cure for a malaise that plagued the euro area for long.

The ECB just announced that it is changing its somewhat nebulous and imprecise goal for an inflation target of “below but close to 2%” to one that pegs it at 2% and also allowing for an overshoot when needed.

*ECB ADOPTS SYMMETRIC 2% INFLATION GOAL OVER MEDIUM TERM
*ECB ADDS CLIMATE CHANGE CONSIDERATIONS TO MONETARY POLICY

Actual forward inflation pricing in the euro area has, if anything, mellowed this week, though much of that may be legitimately ascribed to the mood in the global financial markets. Even so, 5y5y inflation swaps have been nowhere near 2% for about seven years now — underscoring the stiff challenge for policy makers in kindling inflation.

The irony in all this is that in that seven-year period, the ECB has had its benchmark deposit rates below zero, which has of course gone deeper into negative territory if anything over the years. The proposition that negative interest rates will stave off deflation and help spur inflation has proved to be a chimerical dream. The average inflation rate in the five years preceding the introduction of negative rates was 1.7%, compared with just 0.9% in the five years since.

Clearly, wishing for 2% inflation and allowing it to go higher is heady stuff in terms of policy making but getting there requires more than just semantics. History has proven that the answer doesn’t lie in deeper and deeper levels of negative rates or tons of money thrown at the markets to keep rates low — because that may only end up stoking investors’ preference for the safest assets. There are more pronounced hurdles in demographics and productivity that need to be addressed.

Tyler Durden
Thu, 07/08/2021 – 07:08

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