Christine Lagarde expected to change ECB inflation target

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Majority of economists surveyed believe strategic review will shift central bank policy

Christine Lagarde is expected to significantly change the European Central Bank’s inflation target for the first time in more than 16 years as part of next year’s strategic review, according to economists polled by the Financial Times.
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The ECB president will launch a sweeping strategic review of the central bank’s remit and tools in January, and its inflation target will be one of the key areas that the review will consider.

In its only previous strategic review in 2003 it tweaked its medium-term inflation objective from between zero and 2 per cent to a narrower objective of “below but close to 2 per cent” to guard against the risk of deflation.

Having struggled for years to lift inflation in line with this aim, the ECB is widely expected to change its main policy objective once more. More than half the 34 economists polled by the FT said they expected the ECB to amend its inflation target.

Ms Lagarde said this month that interpreting the ECB’s price stability mandate would be the “core and centre” of its review, adding that “there is no preconceived landing zone at this time”.

Many of the economists polled by the FT said they expected the ECB to ditch the “below but close to” part of its existing objective and instead switch to a simpler goal of 2 per cent, which would raise the bar required before it started lifting interest rates again.

“I am optimistic for some important changes: most obviously, an altered inflation target — 2 per cent over the medium term — which does away with the current vague formulation,” said Paul Diggle, senior economist at UK fund manager Aberdeen Standard Investments.

Such a change would bring the ECB into line with the US Federal Reserve and the Bank of England, which both have a straightforward 2 per cent inflation target.

More than 40 per cent of the economists polled by the FT said the central bank should adopt a symmetrical objective, to indicate it would be as worried about inflation being too low as being too high. That principle was embraced by Ms Lagarde’s predecessor Mario Draghi this year in his final months as ECB president.

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“I expect that the ECB’s planned strategic review of monetary policy will result in an adjustment in the definition of price stability to imply a symmetric target around the 2 per cent inflation level,” said Lena Komileva, chief economist at G+ Economics.

Overall, the economists were almost universally positive about the choice of Ms Lagarde to replace Mr Draghi at the start of November, with many of them praising her political experience, communication skills and consensus-building approach.

“[Ms] Lagarde is an outstanding choice,” said Willem Buiter, adjunct professor of economics at Columbia University. “Her insistence on budgetary support measures, especially in countries with material fiscal space — eg Germany and the Netherlands — is entirely justified.”

However many of the economists expressed scepticism about whether the strategic review will achieve much, given the deep divisions that emerged on the ECB governing council at the end of Mr Draghi’s leadership.

Ken Wattret, economist at IHS Markit, said: “The concern remains therefore that longstanding differences of opinion might result in a cosmetic exercise with window-dressing rather than tangible results.”

A handful of the economists surveyed said they expected the ECB to adopt a band of inflation as its new objective, such as between 1.5 and 2.5 per cent, to give it more flexibility to accept periods of lower or higher consumer price growth.

Shifting to a range-based target “would signal that the ECB will start to remove some of its stimulus once core inflation approaches 1.5 per cent”, said Holger Schmieding, chief economist at German bank Berenberg.

Only two economists thought the ECB might lower its inflation objective.

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