The ECB begins its shift to a new inflation goal

The European Central Bank last set its objective for inflation in 2003. In the intervening years, the order that defined that era — one of globalisation, steady growth and centrist politics — has been replaced by an environment that even before the pandemic was altogether more brittle and volatile. That shift thrust central banks into the spotlight, placing responsibility on monetary guardians to experiment with bold policies to soothe market jitters and secure a return to normality. Yet, for all their power, it is also an environment in which they have far less control. For years, policymakers have failed to return price growth to their objective — in the ECB’s case, of below but close to 2 per cent.

The current paradigm is no longer fit for purpose. On Wednesday, the ECB’s president Christine Lagarde gave the clearest sign yet that the bank will abandon it in favour of a new, more aggressive approach that policymakers hope will lift inflation to levels more consistent with a well-functioning economy. At the very least, the bank will make sure its objective is perceived as “more symmetric”, paving the way for policymakers to target inflation of 2 per cent, as opposed to just below.

In shifting the goalposts, the ECB is following the lead set by the US Federal…

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