08 Jul 2021
The European Central Bank has revised its inflation target and will allow consumer prices to overshoot when it is necessary, it was confirmed in a policy review on Thursday.
The central bank currently works to achieve an inflation level of “below, but close to, 2%.” But looking ahead, the official inflation goal will become 2% with overshoots permitted.
“The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable,” the ECB said in a statement.
“When the economy is operating close to the lower bound on nominal interest rates, it requires especially forceful or persistent monetary policy action to avoid negative deviations from the inflation target becoming entrenched. This may also imply a transitory period in which inflation is moderately above target,” it added.
The first monetary policy meeting of the Governing Council employing this new strategy will be taking place on 22 July.
“On paper, a shift from a de facto inflation target of just below 2% to a straight 2% target and the move from a cap just below 2% to a symmetrical approach, which explicitly allows for temporary overshoots, would raise the inflation target and thus signal an even softer policy stance,” noted Holger Schmieding, chief European economist at Berenberg.
“In practice, it will make no major difference in our view as the majority of council members has probably been aiming for that anyway. The new strategy is more in line with that of other major central banks,” he went on to say.