ECB Agrees on New Inflation Goal of 2%, Will Allow Overshoot

(Bloomberg) -- European Central Bank policy makers have agreed to raise their inflation goal to 2% and allow room to overshoot it when needed, according to officials familiar with the matter.

The decision marks a significant change from the previous target of “below, but close to, 2%,” which some policy makers felt was too vague. The consensus emerged at a special meeting on Tuesday and Wednesday to conclude the ECB’s first strategy review in almost 20 years.

The revamped strategy could give officials the justification for sustaining ultra-loose policy for longer as they strive to reverse years of below-target inflation, which have weighed on the euro area’s economic potential.

It will also be crucial for guiding the central bank’s actions as the economy recovers from the pandemic. Policy makers are expected to debate after the summer how to exit emergency measures that include an exceptionally flexible 1.85 trillion-euro ($2.2 trillion) bond-buying program.

An ECB spokesman declined to comment.

The inflation goal was at the core of the review. President Christine Lagarde said last month that while policy makers treated it symmetrically -- meaning they’re committed to respond equally to too low and too high outcomes -- the current phrasing may have made their commitment “confusing for observers and for markets.”

The outcome addresses that, seeking to entrench inflation expectations consistent with the new goal among investors and the wider public.

The ECB approach, though, will be different to the policy of average inflation targeting that the Federal Reserve announced last year after its own review. Bundesbank President Jens Weidmann was among officials who were publicly skeptical of such an approach.

The euro was little changed on the report, and was down 0.2% at $1.1798 at 9:56 p.m. Frankfurt time.

The official results of the review will be published at 1 p.m. on Thursday, and the president will hold a press conference 90 minutes later.

The ECB’s appraisal also covers a wide range of other policy issues including how to aid the fight against climate change, the interaction of fiscal and monetary policies, employment trends and globalization.

While inflation is already predicted to rise well above target toward the end of this year, Lagarde and her colleagues have repeatedly said they expect it to subside to below the goal in the medium term.

Executive Board member Isabel Schnabel hinted on Saturday that the ECB might allow for overshooting. In a speech in Germany, she said policy makers needed to let actual underlying inflation dynamics be seen to line up with forecasts.

“Such patience may lead to inflation outcomes being moderately above our aim for a temporary period of time,” she said. “This will be a necessary and proportionate requirement.”

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