European Central Bank sets its inflation target at 2% in new policy review

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The President of the European Central Bank Christine Lagarde delivers remarks during a joint press conference in Lisbon, Portugal.

Horacio Villalobos | Getty Images News | Getty Images

LONDON — In a major policy review presented on Thursday, the European Central Bank decided to revise its inflation target and allow consumer prices to overshoot when deemed necessary.

In January last year, the central bank in Frankfurt embarked on its first policy review since 2003. However, the outcome of this work had to be postponed in the wake of the coronavirus pandemic. The idea has been to assess how to adapt the ECB’s policies and tools to achieve its main goal of price stability.

The ECB currently works to achieve an inflation level of “below, but close to, 2%.” Going forward, the official inflation goal will become 2% with possible overshoots allowed.

“The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable,” the ECB said in a statement.

What it means

“On paper, a shift from a de facto inflation target of just below 2% to a straight 2% target and the move from a cap just below 2% to a symmetrical approach, which explicitly allows for temporary overshoots, would raise the inflation target and thus signal an even softer policy stance,” Holger Schmieding, chief European economist at Berenberg, said in a note.

“In practice, it will make no major difference in our view as the majority of council members has probably been aiming for that anyway. The new strategy is more in line with that of other major central banks,” he added.

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