Against the background that many central banks have been failing to meet their self-imposed inflation targets for years despite an ultra-expansive monetary policy, the question can be asked as to the appropriateness of these targets. The Fed has now moved forward and announced new targets for the inflation rate and employment development. The ECB, too, announced some time ago that it would be reviewing its monetary policy strategy and possibly adjusting its target inflation rate from the current „close to but below 2% in the medium term“, which it has been using since 2003. In our opinion, the ECB should also be guided by an average inflation rate in its strategy review, which is to be completed by the middle of next year.
We believe it is very likely that the ECB will take its lead from the Fed and will aim for a more flexible inflation target. The Fed’s new strategic orientation should not be viewed without criticism. For example, it has not specified a specific time frame for achieving average inflation, or a precise method of measuring it. In this respect, the ECB must also make a decision on how transparently it will disclose the method of measuring inflation achievement.
In addition, after the strategy adjustment it remains completely open how the Fed intends to manage to achieve an inflation rate of 2% at all after more than ten years of falling short of the target, let alone exceeding this mark for some time. This problem also arises for the ECB if it should consider an average inflation target. There are undoubtedly many structural factors that ensure that inflation rates have fallen in recent years in almost all industrialized countries. These include demographic developments, the inclusion of emerging markets in global trade or increased price sensitivity on the part of consumers.
Last but not least, there is the fact that the ECB is not only adjusting the quantity used to measure price level stability, but like many other central banks will also include other strategic parameters in its target canon. For example, the ECB could place more emphasis on other variables, such as appropriate economic growth or the fight against climate change, if this has a lasting impact on growth and inflation. However, particularly with regard to climate change, opinions are likely to differ widely as to the extent to which the ECB will take concrete measures in addition to research on the effects of climate change on financial markets and monetary policy and a role model function. In this respect, it is probably important for the guardians of the currency to avoid conflicting goals as far as possible. Last but not least, it could be helpful in the formulation of a new set of ECB targets if the ECB were to commit itself more clearly than before to supporting the monetary union itself.