ECB set to tweak guidance to reflect its new 2% inflation target

CNBC reports that the European Central Bank’s new inflation target and its possible effects on monetary policy will be the key topic of today's meeting.

Hopes are high that the euro zone’s central bank will come up with a dovish surprise as President Christine Lagarde keeps stressing the need for a forceful policy response to avoid a de-anchoring of inflation expectations.

The ECB effectively hiked its inflation target from “below but close to 2%” to a symmetric 2% target over the medium term, which means that both overshooting and undershooting is allowed but “not desirable.”

Since the euro zone’s financial crash, consumer price growth has averaged at just 1.2%. In other words, despite all the extraordinary measures deployed amid the sovereign debt crisis, inflation has not achieved the ECB’s target over the last decade.

While some expect more than just tweaks in the ECB’s forward guidance this week, others expect a real sea change to come later this year once there is more clarity about the region’s economic trajectory and the evolution of the coronavirus pandemic.

“We think policymakers’ commentary over the past week suggests that the ECB will go beyond just changing the forward guidance at its meeting on 22 July,” said Luigi Speranza, chief global economist at BNP Paribas, in a recent research note.

“Our bias is to think that we will get greater clarity on the post-PEPP environment as well, underscoring the ECB’s message of persistent accommodation,” he said.