Earlier this month, the European (ECB) reconvened its policy review that was postponed since last year due to the COVID-19 pandemic. During the review, the revised its current goal of achieving an level of “below, but close to 2%” to the new goal of achieving 2% with overshoots allowed. This new target is symmetric, meaning to say that falling below or rising above the 2% target are both equally undesirable.
However, knowing that it is unlikely will be constantly maintained at the 2% target, slight deviation from 2% temporarily is still acceptable by the ECB. But if were to deviate from that target by a significant amount for a sustained period of time, the will carry out the necessary actions to address it.
Revised forward guidance.
During the meeting yesterday, the ECB held its interest rate and quantitative easing ( ) unchanged. The central bank’s President Christine Lagarde said that no discussion on quantitative easing was carried out. In response to the newly adopted target, the ECB has revised its forward guidance on interest rates.
“In support of its symmetric two per cent target and in line with its strategy, the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying is sufficiently advanced to be consistent with stabilising at two per cent over the medium term. This may also imply a transitory period in which is moderately above target.”
Simply put, the will consider an interest rate hike only when is seen to be reaching the 2% target way before the end of its projection horizon and is deemed to sustain for the rest of the projection horizon. Based on the ECB’s economic projection material, the projection horizon is defined to be three years.
With the revised forward guidance, the ECB is now seen to be more accommodative for a longer duration. Looking at the ECB’s quarterly economic projections released in June,
we can see that the central bank’s expectation is still quite a distance from 2%. During the press conference, Lagarde also highlighted that the ECB is expecting “inflation to rise over the medium term” although it is still below the 2% target, while “longer term expectations have increased” but are some distance away from the target. Lagarde also mentioned that the recent rise in in the eurozone is largely due to temporary drivers such as higher energy prices and base effects from the strong decline in oil prices. With the persistently low in the eurozone, it is unlikely the ECB will carry out a rate hike in the near future.