For a start, the strategy seems to mean different things to different ratesetters. Jens Weidmann, the hawkish head of the Bundesbank and a member of the ECB’s governing council, took pains to point out that although inflation might deviate from the target temporarily, the ECB would not aim to exceed it. That is in contrast to America’s Federal Reserve, which also recently revised its target. It plans to aim for inflation of 2% on average, tolerating a period of overshooting in order to make up for past shortfalls. But Olli Rehn, the doveish governor of Finland’s central bank, said on July 9th that he expected the ECB’s response to a shock to be quite similar to that of the Fed.
The different views might explain why, although Ms Lagarde promised that the bank’s next monetary-policy meeting on July 22nd would clarify what the new target means for policy, few analysts are expecting big changes. (The ECB is currently buying €80bn, or $95bn, in government and corporate bonds a month.) Economists at Barclays, a bank, reckon that the review should have no effect on the near-term path for monetary policy, and that the ECB would continue to support the euro area by buying bonds. Analysts at Morgan Stanley, another bank, predict that the ECB might bring forward an announcement to phase out its pandemic-related asset-purchase scheme, but beef up an older purchase programme instead.
Without big changes, it is hard to see how the ECB can do a better job of hitting its target. In June a range of economic forecasters, including those at the central bank, projected inflation to be in the region of 1.4-1.5% in 2023. If it is to successfully convince investors and households that it means business, then the bank will have to explain why, when it does not expect even to meet its old target, it should suddenly be able to hit its new one. ■
