Making sense of the ECB policy review
|2020 is set to be a crucial year for the ECB as it will review its monetary policy strategy / framework.
At next week's ECB meeting, the ECB is widely expected to officially launch the review. So far, few members of the ECB's Governing Council (GC) have shared their views on the strategic review, although ECB President Lagarde said that they will leave no stone unturned and that they aim to conclude it by the end of 2020. However, we find the timeline on the ambitious side given the complexities of this exercise. We expect a conclusion in the course of 2021.
The few GC members' views on the outcome of the strategic review that we have heard are, amongst others:Villeroy (FR) favours symmetric inflation target, similar to Rehn (FI); Knot (NL) favours symmetry around the inflation target (unknown if tolerance or target band); Weidmann (DE) sees no reason to tinker with the aim and Holzmann(AT) favours lowering the inflation target to 1.5%.
We believe the ECB's overarching strategy should be to ensure robustness and flexibility in the objective of price stability.
Further, the ECB will focus on its ability to guide end-users with a strong, credible and transparent commitment, while acknowledging that some flexibility should be expected given the nature of steering inflation.
In the following, we examine ten key questions on the upcoming review:
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Review –why do it now and what is the timeline?
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What is so magical about the 2% number?
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What's in scope of the review?
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How to measure inflation and what inflation measure to target?
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Whatinflation targetregime couldweexpect?
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How do theydecideand vote?
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Will climate change and sustainability be included in the review?
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Will the ECB start to communicatein anotherformat, suchas individualvotes?
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Doesit impactcredibilityand whatimplicationswillit have for the toolbox?
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How to trade the review?
We conclude that the ECB will decide to apply a symmetry with a potential tolerance band around the inflation target mid point
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