ECB Strategy Review Yields Symmetric Medium-Term Stability Objective of 2%, Subject to Deviations
8 July 2021
By David Barwick – FRANKFURT (Econostream) – The European Central Bank on Thursday reconfirmed its commitment to a medium-term price-stability objective but declared this to be a point target of 2% to be understood as a symmetric commitment and expressed a willingness to overshoot.
In publishing the outcome of its strategic review, which yielded no new policy tools, the ECB said that the symmetry of its 2% medium-term inflation objective ‘means that the Governing Council considers negative and positive deviations from this target as equally undesirable.’ The modified inflation target ‘provides a clear anchor for inflation expectations, which is essential for maintaining price stability’, it added.
Symmetry demanded that the ramifications of the effective lower bound be considered, proximity to which would require ‘especially forceful or persistent monetary policy measures to avoid negative deviations from the inflation target becoming entrenched’, the ECB said. ‘This may also imply a transitory period in which inflation is moderately above target.’
Aiming for a medium-term objective ‘allows for inevitable short-term deviations of inflation from the target, as well as lags and uncertainty in the transmission of monetary policy to the economy and to inflation’, the ECB said. It would also imply the ability to respond flexibly when the price stability objective is missed, depending on ‘the origin, magnitude and persistence of the deviation’ and would let the ECB ‘cater for other considerations relevant to the pursuit of price stability.’
The ECB confirmed that its standard interest rates remained the main policy tool, but in view of the constraints these faced, said it would ‘also employ in particular forward guidance, asset purchases and longer-term refinancing operations, as appropriate.’
‘The Governing Council will continue to respond flexibly to new challenges as they arise and consider, as needed, new policy instruments in the pursuit of its price stability objective’, it said.
Monetary policy decisions would include an economic analysis as well as a monetary and financial analysis, in which the economic analysis would continue to look at real and nominal developments, while the monetary and financial analysis would pay special attention to the transmission mechanism and financial or monetary risks to price stability, according to the ECB.
‘This framework reflects the changes that the ECB’s economic analysis and monetary analysis have undergone since 2003, the importance of monitoring the transmission mechanism in calibrating monetary policy instruments and the recognition that financial stability is a precondition for price stability’, the ECB said.
Although the ECB called the Harmonised Index of Consumer Prices (HICP) ‘the appropriate measure for assessing price stability’, but asserted that including owner-occupied housing would be an improvement. However, given how long this would take, ‘in the meantime, the Governing Council in its monetary policy assessments will take into account inflation measures that include initial estimates of the cost of owner-occupied housing to supplement its set of broader inflation measures.’
The ECB said it was committed within its mandate to taking into account climate change and the shift to a greener economy, and thus to ‘an ambitious climate-related action plan’ under which monetary policy assessments would consider relevant factors.
Moreover, the ECB said in this context that it would ‘adapt the design of its monetary policy operational framework in relation to disclosures, risk assessment, corporate sector asset purchases and the collateral framework.’