ECB said to be studying potential revamp of inflation goal

Author: Justin Low | Category: Central Banks

ECB staff are believed to be calling the 'below, but close to 2%' definition of the mandate into question


A report by Bloomberg is saying that staff at the ECB have begun studying a potential revamp of their inflation goal, in a move that could potentially embolden policymakers to pursue monetary stimulus for a longer period, citing officials familiar with the matter.

They are informally analysing the central bank's policy approach, which includes questioning the current inflation target mandate of 'below, but close to 2%' and whether or not it is still appropriate for the post-crisis era.

The report says that the work done so far is confidential and preliminary and that any change to the goal itself would probably require a formal review.

Well, this is quite a significant change not only for the ECB but it could potentially set a precedent for other major central banks around the globe. The question of inflation has been a puzzling one over the past few years especially when considering the fact that labour markets have been tight.

It has always played in the minds of economists to potentially reevaluate the need for a 2% inflation target but we're potentially seeing the first steps by a central bank in considering such a position.

For some context, the ECB's mandate is basically to just maintain price stability and there hasn't been any change to their mandate of 'below, but close to 2%' since 2003. Hence, this is something quite unprecedented.

The headline is dragging the euro lower with EUR/USD marked down to 1.1206 from 1.1230 levels earlier. On the one hand, it could be a signal that accommodative and easing monetary policy will be needed for a prolonged period if inflationary pressures aren't what they used to be. But on the other, it's suggestive of a new paradigm in central bank theory to adjust monetary policy based on a lower inflation target - which I reckon may be a positive as the threshold for tightening policy is seen to be lower.

I may be wrong in that sense but that's what comes to mind at the moment. Any one care to venture any thoughts on the matter?

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