ECB Fine Tunes Strategy to World Delivering More Frequent Shocks
GlendonThe European Central Bank unveiled tweaks to how it uses monetary policy to steer the economy, reflecting on the recent spike in inflation and anticipating that such shocks are likely to occur more often in the future.
The European Central Bank unveiled tweaks to how it uses monetary policy to steer the economy, reflecting on the recent spike in inflation and anticipating that such shocks are likely to occur more often in the future.
Under the updated strategy, published Monday as officials gather for their annual retreat in Sintra, Portugal, the ECB:
- Confirms its symmetric 2% inflation target over the medium term.
- Will use an appropriately forceful or persistent policy response to large, sustained deviations of inflation from the target in either direction.
- Will keep all tools in its toolkit, with their choice, design and implementation to enable an agile response to new shocks.
- Their use at any time will continue to be subject to a comprehensive proportionality assessment.
- Sees structural shifts like geopolitical and economic fragmentation, and the increasing use of artificial intelligence, making the inflation environment more uncertain.
- Will take into account risks and uncertainty in the outlook for inflation and the economy, including through the appropriate use of scenarios and sensitivity analyses.
“This assessment was a valuable opportunity to challenge our thinking, check our policy toolkit and fine-tune our strategy,” President Christine Lagarde said in a statement. “It provides us with an even stronger basis to conduct monetary policy and fulfil our mandate of price stability in an increasingly uncertain environment.”
The exercise — kicked off last summer — focused on poring over the results of the central bank’s last review, which ended four years ago. It sought to draw lessons from the unprecedented surge of inflation in 2021 and 2022, which caught the ECB off guard and sparked criticism that officials acted too late in raising interest rates.
The 2021 review – the first in almost two decades – was shaped by the pre-Covid experience of very low consumer-price growth and was quickly put to the test with inflation peaking at a double-digit record, following the pandemic and the war in Ukraine. The ECB started hiking rates in July 2022, when consumer prices were already rising in excess of 8%.
At the same time, the ECB aims to equip itself better for an environment that looks set to serve up more frequent and disruptive economic shocks due to factors such as de-globalisation, decarbonisation and demography. US President Donald Trump’s erratic policies, in particular on trade, served as a reminder of how quickly the outlook can change.
In the US, the Federal Reserve is also re-evaluating how it sets and communicates monetary policy amid criticism that its 2020 framework of “flexible average inflation targeting” contributed to underestimating the severity of the following inflation burst and the slowness in raising rates.
The ECB said the next assessment of its strategy is likely to take place in 2030.
