ECB's Lagarde clarifies the new changes in the central bank's strategy
(Kitco News) - Just last week the ECB announced that it will be changing the way it describes "price stability". The way the bank measures its inflation and its targeted inflation rate will now change to a "symmetric two per cent target" rather than the previously cited "below, but close to, two per cent" ambiguous definition.
ECB president Lagarde said "Number one, it is simple. So we do away with the perceptions, the ambiguity, the variations between what some see as 1.7, others as 1.95. It's two per cent and it is simple. It is solid because it gives us space to manoeuvre our monetary policy, it is a well-accepted measurement of price stability around the world and it limits the welfare cost of too high inflation."
She went on to clarify what would be tolerated by saying "we affirm very clearly that there may be deviations up or down, either below or above two per cent and we state that we consider both deviations up or down as equally undesirable. At the same time, we know that it's not going to be a straight two per cent linearly forever once we reach the target and we'll recognise that it will oscillate around two per cent."
If the measure of inflation moves lower there will be a response to and noted "we also acknowledge and draw the conclusion from the constraints resulting from the effective lower bound, and we know that as we are close to the effective lower bound, it will require an especially forceful or persistent monetary policy response."
When asked if this new strategy makes the ECB more accommodative than it was previously Lagarde added "I think the new strategy gives us the ability to be flexible around two per cent, because we recognise that two per cent is not a ceiling and we recognise that there will be oscillation around two per cent. It is more flexible in that we recognise the effect of the effective lower bound and the constraints that it imposes on us.". She also said, "I'm not saying that it is more accommodative, but I'm saying that the tools are there and, if they need to be used, we recognise their effectiveness and the fact that some of them, given the effective low bound that we are close to, will have to continue being used."
There is a lot to unpack in this interview but it is how this impacts monetary policy that is important. Lagarde made clear that the ECB wanted to remove the ambiguity surrounding the inflation target and that she wanted to add the cost of housing in the calculations. Some analysts have suggested that this makes it easier to keep the accommodative monetary policy for longer but there is an argument that Lagarde said she would react in an appropriate manner if the HICP rate moves towards the upper and lower bounds. Over the next 6-8 weeks market participants will be able to see how this works in practice and some key questions could be answered.