By Francesco Canepa
SINTRA, Portugal (Reuters) -The European Central Bank said on Monday it was bracing for five more years of economic upheaval as disruptions from geopolitical rifts to artificial intelligence take their toll, potentially requiring “forceful” action to keep inflation in check.
The ECB was updating its five-year strategy after a rollercoaster period in which it went from worrying about deflation during the pandemic to a cost-of-living crisis exacerbated by Russia’s invasion of Ukraine and, most recently, disruptions from a simmering trade war.
The euro zone’s central bank said the turmoil likely wasn’t over, courtesy of “structural shifts” such as geopolitical and economic fragmentation, as well as demographics and climate change.
“The inflation environment will remain uncertain and potentially more volatile, with larger deviations from the symmetric 2% inflation target,” the ECB said.
It pledged to react with equal vigour when inflation was too high as when it was too low, tweaking its message after being blind-sided by a surge in prices 2021-22.
While the ECB stuck to its promise – fought over internally – to deploy “forceful” policy measures, it said it would do so when inflation strayed far from its 2% target in either direction — rather than just to the downside.
“To maintain the symmetry of the target, appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the target in either direction is important,” it said.
The ECB’s previous strategy statement, published in 2021 when inflation had just started rising, was mostly focused on the risk of price growth getting stuck at low levels, something now seen as a mistake by some central bankers.
Presenting the new strategy, the ECB’s chief economist Philip Lane said that phrase remained appropriate when inflation was too low but he and colleagues had learned that was “equally true above target”.
“What we learned is that when inflation starts to build, it can take off,” Lane said. “That’s why you need to be forceful.”
The ECB raised its key interest rate from -0.5% in 2022 to 4.0% just over a year later to rein in runaway prices. It has since cut it back to 2%, where it is expected to pause at least until September.
SOUL SEARCHING?
Some of the 25 policymakers on the ECB’s Governing Council had wanted to engage in greater soul-searching about the central bank’s ultra-easy policy of the last decade.
Yet the new strategy contained little criticism, as sources had indicated it would in comments to Reuters earlier this year.
“The tone was less introspective and more of a reaffirmation that the ECB was on the right track,” ING’s global head of macro Carsten Brzeski said.
In one rare backward glance, though, the ECB made a veiled reference to its belated reaction to high inflation in 2021-22, when it had tied its own hands by committing to keeping rates at record lows for as long as it was still buying bonds.
Lane said any future asset-purchase programme would “look different” in light of that misstep and the ECB would also look at scenario analysis before launching new schemes.
A growing number of policymakers from the ECB’s hawkish camp – those who favour a tighter monetary policy stance – have signalled in recent weeks that the bar for more bond buying, or quantitative easing (QE), would be higher in the future.
In an interview with Reuters, the ECB’s vice-president Luis de Guindos said the euro zone’s central bank had now learned more about QE’s side effects.
The programme has been blamed for a bubble in financial and property markets and for causing massive losses at the ECB and its shareholding central banks once interest rates rose.
(Reporting by Francesco Canepa; Editing by Alison Williams and Hugh Lawson)
Comments