European Central Bank watchers are virtually convinced President Christine Lagarde will change the institutions inflation goal for the first time in 17 years as she attempts to achieve the price stability that eluded her predecessor.To get more news about WikiFX, you can visit WikiFX news official website.
Almost 90% of respondents in a Bloomberg survey predicted the ECB will officially alter its strategy to give equal weight to too-low and too-high inflation. Half said the current aim of “below, but close to, 2%” will be made more precise.
The ECB is trying to understand why inflation has fallen short despite years of negative interest rates and 2.6 trillion euros ($2.9 trillion) of bond purchases under Mario Draghi, who held the presidency from 2011 until late last year. Clarifying or changing the definition of price stability might help policy makers hit their mandate, though it also risks accusations that theyre simply moving the goalposts.
Building Expectations
Economists are developing views on results of ECB strategy review
With the survey also showing economic concerns easing, Lagarde should have the headroom to conduct the most comprehensive reappraisal since at least 2003 -- lasting most of this year and, in her words, having “no preconceived landing zone.” Shes told Governing Council members she wants to get the process under way at the Jan. 23 policy meeting.
Her colleagues have staked out their positions for months, signaling broad support for an evaluation of the inflation goal but no obvious consensus on what should be done with it.
Compared with the previous survey in December, an increased share of economists said the ECB will set a more precise inflation goal, and give itself more flexibility to let inflation overshoot. More also predicted that the institution will pick a new inflation measure after growing criticism that the current one from the European Unions statistical office underweights major expenses such as housing.
“One plausible outcome of the review is a target range for inflation with a midpoint of 2%,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt. “This would give the Governing Council the flexibility to decide case by case whether some overshooting is appropriate or not.”
Lagarde has also promised to consider how the ECB can aid the fight against climate change, calling it mission critical for the institution. It‘s been a thorny topic for some policy makers though, amid concerns the central bank’s focus on price stability may be diluted. More than half of respondents said the ECB wont take the impact of global warming into account when setting its policy this year.
In fact, most predicted that not much will change at all in 2020, or in most of 2021. They expect quantitative easing, which was controversially resumed in November, to stay at 20 billion euros a month and be halted around the end of next year. Interest rates are seen as being raised by the second quarter of 2022.
ECB Timeline
At least the clouds that have darkened the economy for almost two years appear to be lifting slightly. The level of concern over threats including recession and trade war fell to the lowest since April 2018. The U.S. has signed a “phase-one” trade deal with China, and European economic indicators have shown signs of stabilizing, though the U.S. military strike on Iran this month has exacerbated Middle East tensions.
That raises the prospect of a debate at the ECBs policy meeting over its description of the risks to its outlook as “tilted to the downside.” Lagarde said in December that such risks have become “somewhat less pronounced,” and Executive Board member Yves Mersch said this week that they are “less skewed.”