Following the conclusion of its Monetary Policy Review, the ECB has updated its monetary policy strategy. The main evolution is the replacement of the ambiguous “below, but close to two percent” inflation target by an unambiguous two per cent inflation target over the medium term. The Governing Council’s commitment to this target is symmetric, meaning that negative and positive deviations from this target are considered as equally undesirable. In line with the Federal Reserve’s new average inflation targeting framework, the ECB acknowledges the necessity to tolerate above target inflation in order to anchor long term inflation expectations at two percent. The second change is the introduction of climate risk as an input in the Central Bank’s monetary policy operational framework. In this article, we analyse the rationale, the technicalities and the potential implications of these changes.
More than a decade after the invention of Bitcoin in 2008 by a group of techies using the name Satoshi Nakamoto and almost three years after the Great Crypto Crash of 2018, crypto-currencies and digital assets are finally coming of age. A few countries are spearheading the global regulatory effort by focusing on the opportunities associated with the crypto revolution in what looks increasingly like a fierce global competition to replace the traditional foundations of money, banking and finance with new principles and procedures.
Following the meeting of its Governing Council on June 4, the ECB announced an extension of its Pandemic Emergency Purchase Programme (PEPP) with an additional enveloppe of €600 billion. The total asset purchases made by the Eurosystem (ECB+ National Central Banks) to counter the coronavirus crisis including PEPP and additional APP purchases is now expected to reach almost €1.5 trillion. The bleak outlook for inflation shows the profound deflationary forces at work in the Euro area. Judging from the experience of the last few years, we believe the ECB’s assessment of an uptick in core inflation by 2022 to be too optimistic.
A Pandemic OMT – P-OMT – might well be the most appropriate solution in the current context – and perhaps the only one that is available, especially if discussions around a common Eurozone fiscal package fail to produce meaningful results – in order to support individual Eurozone member countries, while preserving the overall financial stability of the Eurozone and the autonomy and credibility of the ECB.