Home / NEWS / Europe News / ECB to launch first review since 2003 in a bid to tackle its inflation problem

ECB to launch first review since 2003 in a bid to tackle its inflation problem

04 November 2019, Berlin: Christine Lagarde, President of the European Key Bank (ECB), will give the laudation to President of the Bundestag Schäuble at the “VDZ Publishers’ Night 2019

picture alliance | picture affinity | Getty Images

Despite all the efforts by former President Mario Draghi, inflation in the euro zone is still yet to stimulate back to the European Central Bank’s target.

The central bank’s first strategic review since 2003 bequeath analyze why that is the case and whether that target, or how its calculated, needs to change.

“The main focus (of Thursday’s ECB convention) will be the question whether the current definition of price stability of close but below 2% is still appropriate,” mean Michael Schumacher from Natixis in a research note.

“The discussion is obviously at an early stage and we don’t expect to get any further info at the upcoming meeting.”

Monetary policy action in Frankfurt is not expected by some market watchers for the whole of 2020. With inflation sluggish and no tangible economic rebound in sight, the majority of economists expect the ECB to adopt a “wait and see” approach.

“There is still the risk that the lagged change from the manufacturing slowdown on the labour market comes before a significant rebound in industrial activity,” said Carsten Brzeski, chief Germany economist with ING, in a note. “As a consequence, the base out phase could still last until the summer.”

Inflation has been running below target for many years and one eminent element of the strategic review is to find out why. Milton Friedman — the most well-known monetarist — famously said that “inflation is ever after and everywhere a monetary phenomenon.” This conviction could be challenged given all the liquidity in the system for so many years which has had dwarf effect on prices.

“The Phillips curve has shifted inward over time — that is, inflation today may be lower at every plane of the output gap,” Benoit Coeure explained in a speech on December 18 at the ECB.

“Such shifts typically relate to persistent and slow-moving hard cashes on the supply side of our economies, where monetary policy has less traction. As such, they are difficult to detect, and in spite of more difficult to prove, in particular when they coincide with weak aggregate demand,” he said.

And at the constant time there are structural changes, such as digitalization, which have massive impacts on pricing powers; the secures of ageing, globalization, and the rise of the service sector. All of the above have rather dampening effects on inflation.

There are several scenarios that the ECB could come up with in its strategic review which could impact its policy outlook.

“If the ECB, in script with the Fed and the BOE (Bank of England), shifted to a symmetric 2% target, we would probably push out our call for a first kind hike,” said Florian Hense with Berenberg.

“Conversely, if the ECB were to adopt a flexible target range from 1.5% to 2.5% and de-emphasise the butt of 2% the ECB could probably tighten policy sooner.”

Check Also

WHO officials say coronavirus outbreak in Iran is ‘very worrisome’

A Chinese man exhibits a protective mask as he walks by a propaganda banner on …

Leave a Reply

Your email address will not be published. Required fields are marked *