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L. Bini Smaghi - The new ECB Strategy: What will change?

On 8 July 2021 the ECB published its new Monetary Policy Strategy. Following the announcement, it is legitimate to ask what might change in the conduct of monetary policy in the Eurozone as it goes forward.

The immediate – intuitive – answer to the question is that no major change should be expected. The reason is that the new strategy is not that different from the previous one, although it is certainly clearer. Financial markets do not seem to have reacted significantly in any specific direction, although it may be too early to tell.

The main change concerns the definition of price stability, which is the primary objective of the ECB. At the start of the monetary union, the ECB defined price stability as an inflation rate of “below 2%”. The definition changed in the 2003 Strategic Review to “below but close to 2%”. It is now simply 2%.

The clarification is certainly welcome, and it was advocated by many in the past, given that there was still some margin of uncertainty about what was really meant by “below but close to”. In the minds of most ECB policy makers the alleged “below but close to 2%” was in fact not significantly different from 2%. At his farewell event as ECB President, on 24 October 2011 Jean-Claude Trichet proudly reminded everyone that, “The achievements of the Euro as a currency have to be judged against its primary mandate. Over nearly thirteen years, and in spite of a series of major global economic and financial shocks, average yearly inflation has remained at 2.0% for 332 million fellow citizens.” 

The other main element of the clarification is the symmetry of the new target. As explained in the ECB’s explanatory document, “symmetry in the inflation target means that the Governing Council considers negative and positive deviations of inflation from the target to be equally undesirable.”

Click on the PDF file below to continue reading the document.

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The new ECB Strategy - What will change.pdf905.06 KB