By Mark Schroers And Jana Randow
The ECB confirmed yesterday that it will take a symmetric approach to keeping price growth at that level over the medium term, and said it will use an 鈥渁ppropriately forceful or persistent policy response鈥 to large and lasting deviations in either direction.
That is a shift from its findings four years ago, when policymakers committed to taking 鈥渆specially forceful or persistent鈥 action to avoid too-low inflation becoming entrenched when the economy is 鈥渃lose to the lower bound鈥.
The change, unveiled as officials gather for their annual retreat in Sintra, Portugal, comes in response to the unprecedented surge of inflation in 2021 and 2022 that caught the ECB off guard and sparked criticism that it was too late in raising interest rates.
Officials kicked off their review last summer, aiming to prepare 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.
鈥淭he virtue of this exercise鈥 is 鈥渢hat it鈥檚 a strategy for all circumstances,鈥 ECB president Christine Lagarde told a press conference. She conceded that the previous assessment was less forward looking and more influenced by the ECB鈥檚 past experience.
In the US, the Federal Reserve is also re-evaluating how it sets and communicates monetary policy amid criticism that its 2020 framework of 鈥渇lexible average inflation targeting鈥 contributed to underestimating the severity of the following inflation burst and the slowness in raising rates.
It is proceeding as US president Donald Trump offers regular reminders with frequent policy shifts, especially on trade, of how quickly the outlook can change.
The ECB鈥檚 review concluded that structural shifts in the global economy such as geopolitical and economic fragmentation, and the increasing use of artificial intelligence, make the inflation environment more uncertain.
To better account for risks and uncertainty to the inflation and economic outlook, it will make 鈥渁ppropriate use鈥 of scenarios and sensitivity analyses.
鈥淭his assessment was a valuable opportunity to challenge our thinking, check our policy toolkit and fine-tune our strategy,鈥 Ms Lagarde said in a statement.
鈥淚t provides us with an even stronger basis to conduct monetary policy and fulfill our mandate of price stability in an increasingly uncertain environment.鈥
Policymakers decided to keep all tools in their kit, though agreed that they would conduct a 鈥渃omprehensive proportionality assessment鈥 before putting them to use. They said that whenever two alternative instruments can deliver similar results, implications for the ECB鈥檚 balance sheet should be considered.
Central banks across the 20-nation euro zone have faced painful losses as a result of large-scale bond purchases that have led to calls to rethink the viability of quantitative easing as a policy instrument. While the review indicates quantitative easing could be used again in the future, the ECB鈥檚 comments suggest it may be used more sparingly.
鈥淭he scale of the monetary-policy response depends on the scale of the problem,鈥 ECB chief economist Philip Lane told reporters.
He argued the ECB will strive to ensure that any future decision won鈥檛 only be appropriate in the event the economy follows the most likely path forward but also if risks start to materialise.