As was rumored in the run-up to the strategy presentation on Thursday, Europe's monetary authorities are gaining more leeway when it comes to inflation.
The European Central Bank (ECB) is aiming for an annual inflation rate of 2 percent for the euro area, as the central bank announced on Thursday.
That is a little more than the previously estimated “under, but close to two percent”.
In the future, in its efforts to ensure price stability in the currency area of the 19 countries in the medium term, the ECB will at least temporarily accept inflation rates that are “moderately above the target value”.
With such a “symmetrical” inflation target, the central bank is no longer forced to react immediately if the rate of price increases should temporarily deviate upwards or downwards from the percentage target.
The euro currency authorities also recommend that in future the prices for owner-occupied residential property be included in the calculation of the inflation rate, which they consider to be a key indicator for their monetary policy.
However, the ECB sees this as a longer process.
The changed inflation target is a core result of the review of the monetary policy strategy initiated by the ECB President Christine Lagarde, who has been in office since November 2019.
Over the past 18 months, the focus has been on formulating price stability, the monetary policy instruments and communication of the central bank.
The main goal of the central bank is still a balanced price level, i.e. price stability.
The ECB believes that this is best guaranteed if prices in the euro area rise moderately.
For this reason, when the ECB was founded in June 1998, an inflation target at a distance from zero was chosen.
However, the inflation rate in the euro area has often been well below 2 percent since 2013, although the ECB has been smuggling huge sums of cheap money into the markets for years and keeping interest rates at a record low.
Critics have long accused the ECB of having maneuvered itself into a dead end with its rigid inflation target and called for more leeway.
"Unfortunate time"
It is to be welcomed that the ECB Council did not agree to an explicit reference to the average inflation rate, says Friedrich Heinemann from the economic research institute ZEW. “This would have been understood as a clear announcement to allow inflation well above 2 percent for years.” Nonetheless, the new goal of higher inflation rates paves the way. Because lower inflation is now considered to be just as bad as higher, the Council will find it even easier to justify a continuation of the extremely loose monetary policy. The explicit reference that moderate exceeding of the target would have to be accepted temporarily weakens the binding nature of the target as an upper limit.
The timing of the strategic decision is unfortunate. Just as some euro countries have become dependent on the ECB's bond purchases, the ECB is lowering its long-term ambitions to limit inflation. This could be understood as a signal that the ECB is now already anxiously looking at securing high debt levels, even in strategic decisions. The greater inclusion of housing costs is, however, to be welcomed without reservation. "In the residential sector in Europe, inflationary processes have started that affect the consumer sensitively, but have not yet been adequately taken into account in the inflation measurement."