ECB makes first tweak to inflation target in two decades
The European Central Bank has made the first change to its monetary strategy since 2003 after admitting that raising rates in 2011 just before the Eurozone debt crisis was a mistake.
Following years of failing to achieve a 2% inflation target the governing body has moved to a symmetrical target of 2% which means the bank considers positive and negative deviations ‘equally’ undesirable.
ECB president Christine Lagarde said she wanted to avoid negative deviations from target becoming entrenched.
Importantly, the new policy has inbuilt flexibility to tolerate inflation above target in the short term after a period of persistently low interest rates.
In practice analysts think the change will make it more likely that the central bank will keep interest rates lower for longer.
The bank also acknowledged that climate change has ‘profound’ implications for general price stability and committed to an action plan, including moving asset purchases away from heavy carbon emitting companies.
The ECB policy change doesn’t go as far as the US Federal Reserve last autumn when it moved to an explicit average inflation target, which means it aims for higher prices to make up for past target undershoots.