The ECB had previously chosen to keep inflation below, but close to 2%
The European Central Bank has revised its own inflation target to 2% and confirmed its willingness to let it surpass this level at times.
The announcement gives chiefs at the central bank the ability to keep interest rates down for a longer period of time.
The ECB had previously chosen to keep inflation below, but close to 2%, therefore this change allows it to put forward more robust stimulus measures if needed.
The revised target is defined as ‘symmetrical’. This means that going below 2% is equally as unfavourable as going above the level.
President of the ECB Christine Lagarde said: “The new strategy is a strong foundation that will guide us in the conduct of monetary policy in the years to come.”
“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,” the ECB said. “This may also imply a transitory period in which inflation is moderately above target.”
Commenting on the ECB Strategy Review, Jesús Cabra Guisasola, Associate at Validus Risk Management, said: “The ECB is trying to mirror the Fed’s monetary policy by letting the inflation target of 2% move above or below this level when needed.”
“Nevertheless, this announcement is softer than the Fed’s 2% average inflation target as the HICP inflation average in the euro-area has been well below this goal for the last decade.”
“Looking ahead, this decision will provide further support for the ECB to continue its ultra-dovish tone and supporting the eurozone with favourable financing conditions.”
“Mute reaction in the FX market after the announcement. However, the euro is now trying to recover some of its losses against the dollar after falling below the $1.18 support level yesterday.”
Eurozone inflation fell in June amid a fall in the price of oil, according to data published last month. Inflation across the EU was down by 0.1% from May to 1.9% in June.
