Europe | ECB: focus slightly askew

Summary

Last week the ECB held its first meeting since announcing its Strategy review of monetary policy a few days ago, in which it faced the dual challenge of nailing down future strategy and taking decisions on existing policies.

Key points

• Key points:
• The ECB's latest strategy involves switching from an inflation target below but close to 2%, to a symmetric one of around 2% — a little clearer and more flexible than before, but far from that of the Fed, who adopted an average inflation target.
• Feelings were mixed about the first meeting in this new phase. It is not clear why in a situation where monetary policy is close to the lower bound, the ECB's focus in the change to its forward guidance is on raising interest rates rather than on the asset purchase program.
• Equally surprising is the lack of discussion of the PEPP, despite that prior to the meeting some members of the ECB's Governing Council had created expectations that it would be an issue. This though may be due to the usual internal debate within the Council.
• The ECB will not be able to avoid giving guidance on the PEPP at its September meeting. If the recovery remains strong and inflation moves out of the depressed zone where it has been stuck in for the last decade, we will be closer to a stage of monetary normalization and the controversy within the ECB could increase — clear guidance and good communication will be key.

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