The inflation rate in the euro area has risen sharply in recent months and reached 4.9 percent in November, the highest level since the introduction of the euro.

If one believes official assurances, the European Central Bank (ECB) will by no means adjust its monetary policy course.

ECB President Lagarde and other members of the Governing Council have so far regularly assured that the ECB intends to continue its expansionary monetary policy in the future.

Although it does not rule out reducing bond purchases, interest rates are not to be increased for the whole of next year.

But why is the ECB sticking to an expansive course despite record inflation?

In her justification, she points out that the rise in inflation is likely to be temporary because the underlying drivers of inflation, such as supply chain problems, are short-term in nature.

This argumentation is in line with the inflation forecasts of the ECB: According to the official forecast from September, inflation in the fourth quarter should amount to 3.1 percent, but fall below 2 percent again in the second quarter of 2022, without any change in the monetary policy course .

The ECB used to overestimate inflation

But how credible are the inflation forecasts on which the ECB's arguments are based? To clarify this question, it is worth taking a look at the past development of inflation and the respective forecasts. As it turns out, the ECB's forecasts almost always suggest that the inflation target will be reached within two years. In retrospect, however, it appears that this assessment was regularly too optimistic. For example, the ECB generally underestimated long-term inflation up to the financial crisis in 2007 and 2008 and has tended to overestimate it since 2013.

That is not to say that the ECB's inflation forecasts are particularly bad. Other predictions are similarly imprecise. Predicting inflation, like economic development in general, is notoriously difficult. What is surprising, however, in view of the forecasting performance in the past, is the vehemence with which the ECB rejects an adjustment of the monetary policy course, not least with reference to the current inflation forecast.

In addition, the ECB is currently making its forecasts in an environment of great uncertainty.

In fact, since June 2020, due to the increased uncertainty itself, the ECB has refrained from quantifying the uncertainty of its annual forecasts and instead only creates alternative scenarios for how inflation will develop in different courses of the pandemic.

Measures only work after a delay

It is undisputed that monetary policy measures only have a delayed effect on inflation. Estimates suggest a delay of between six months and two years. An immediate change in monetary policy would therefore affect the inflation rate in summer 2022 at the earliest. Long-term forecasts of the inflation rate are therefore of central importance for the design of monetary policy. If one assumes - as is currently the case with the ECB - that inflation will decline even without monetary policy measures, a change in course today would even be counterproductive. However, that a change in the expansionary monetary policy stance is practically ruled out for the near future,seems problematic to us in view of the current uncertainties and the low precision of long-term inflation forecasts. In particular, there is a risk that inflation will persist, contrary to the assumptions of the ECB but in line with previous experience.

In our opinion, it would therefore be appropriate to signal readiness to fundamentally change the monetary policy course if the inflation trend does not weaken significantly in the next few months.

One can only speculate about the motives of the ECB to act differently: It is conceivable that the ECB's assurance that inflation is limited in time serves to dampen inflation expectations.

Because moderate inflation expectations are helpful for a functioning monetary policy.

However, if the ECB's assurances do not come true, they could do exactly the opposite.

Ultimately, the ECB is jeopardizing its credibility.