New strategy, new forward guidance. On rates. After adopting a new inflation target, now equal to 2% symmetrical, the European Central Bank changed its indications on the future trend of rates, the so-called forward guidance or «forward guidance».
Interest rates will then remain at their current level, or lower, until inflation is set to hit 2% well before the end of the time horizon of its macroeconomic projections – at least two years, then – and do so in a “lasting” way for the remainder of that period.
Loading…
Therefore, it will not be satisfied with seeing 2% appear at the end of the “medium term” to which all monetary policy and its forecasts refer, but the objective must appear first and not be abandoned in subsequent years. Furthermore, after a period of low inflation and rates close to the minimum possible, the ECB expects – and will accept – inflation “moderately” above the target (presumably in the 2-2.5% corridor).
Progress in underlying inflation – “core” inflation – will also need to be consistent with a stabilization of headline inflation at 2% over the medium term. This is to avoid that an acceleration of the index linked to the increase in the price of some particularly heavy goods in the basket (typically fuel and energy) which signals strong changes in relative prices but does not require monetary policy interventions – not immediately at least – from creating expectations that are justifiable only with a generalized increase in prices.
The difference is evident from the formulation still used in June, which has been present for months in official monetary policy announcements. Under the old strategy, the ECB aimed for inflation that converges “at a level sufficiently close to 2% within the time horizon of the projections”. Convergence confirmed by the trend in core inflation.