If the recent press conference by ECB President Mario Draghi showed anything, it was that the monetary authorities are anything but satisfied with the inflation trend. Inflation expectations, in particular, are a cause for concern as they have now fallen below the levels that would have been reached at the time of the launch of the
The main factors were the bond purchases and the increase in bond purchases from EUR 60 billion to EUR 80 billion. The monetary authorities have taken various measures to ensure that inflation expectations do not lose their roots. Only in June was the forward guidance extended to mid-2020. In addition, the ECB had
new TLTROs on the way. However, all these measures seem to have had little effect, as inflation expectations have continued to fall. This development could, in the final analysis, indicate that market participants fear that the ECB has lost control over inflation.
Against this backdrop, the monetary authorities have taken another chess move to allay market concerns and raise inflation expectations. So far, the ECB has had an asymmetric inflation target, with price levels expected to be below but close to 2%. This formulation implied,
that the ECB would act at inflation rates above 2%. The monetary policy control parameter of the central bank, which has been in force for years, has now been „thrown overboard“. In their statement, the monetary authorities are currently emphasising that they are pursuing a symmetrical inflation target, i.e. also allowing levels above 2%. This is a much more far-reaching and unconditional promise of low interest rates than had previously been promised. Ultimately, this new inflation target implies that due to the low inflation rates of the past, the central bank will purely arithmetically tolerate higher inflation rates in the future without stepping directly on the brake of monetary policy.
The message to the markets is clear: the ECB’s monetary policy orientation will probably remain expansionary for a very long time. The ECB is relieving companies, households and investors of the concern that the easing of monetary policy will be reversed as soon as the first signs of an improvement in fundamental data appear and that the
is nipped in the bud. At the same time, however, the change in this strategic target can also be interpreted as an admission that the ECB is currently unable to control the inflation rate precisely.