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The European Central Bank could bend its main policy objective as it combats the economic decline from the coronovirus crisis.
Since 2003, the central bank has targeted an “down, but near 2%” inflation rate in an effort to address concerns over significant consumer price increases. However, the ECB is currently more concerned with sluggish price increases. Consequently, a review of recent strategy in Frankfurt may give rise to a new goal.
“In the current climate of low inflation, the concerns we face are different (compared to 2003) and it needs to reflect our inflation target,” ECB President Christine Lagarde said at a press conference on Wednesday.
He spoke of a widespread debate over whether central banks should explicitly commit to memories of inflation in order to spend some time below their targets.
“If reliable, such a strategy can strengthen the ability to stabilize the economy when facing the lower,” Lagarde said.
“While makeup tactics can be less successful when people are not fully rational in their decisions – Which is probably a good approximation of the reality we encountered – the utility of such an approach can be examined. ”
Annual inflation in the euro area averaged 2.3% from 1999 to 2008, at which time the global financial crisis hit. According to ECB data, since 2008, inflation has averaged only 1.2% by the end of 2019. A review of the ECB’s strategy is studying how to adapt its policy to the current economic reality.
In the United States, the Federal Reserve has made a similar assessment and announced in late August that it would allow inflation to run above the 2% target for “some time”. This means that the central bank will be less likely to raise interest rates – a move that has wider implications for the financial markets and for the everyday consumer.
“Many people know that the Fed wants to push inflation forward,” said Federation President Jerome Powell. “However, inflation that is consistently too low can pose serious risks to the economy,” he said.
Very low inflation is also a cause of concern among European authorities.
Speaking to European lawmakers on Monday, Legaard warned that upcoming data could point to further deflation – when inflation rates enter negative territory, meaning prices are falling rather than rising.
The flash inflation rate for August had already dipped to -0.2% from 0.4% in July.
Central bankers closely monitor deflation as it may escalate the financial crisis. In a healthy economy, prices rise at a gradual pace, not fall.
According to forecasts made by the ECB, the euro zone is on track for an annual contraction of 8% in gross domestic product (GDP) this year.
The health emergency caused by the coronovirus outbreak has hit the region hard, with many industries struggling to keep the business alive.
Despite a rebound in activity in the third quarter, there is doubt as to how the euro area will perform in the last quarter of the year as several countries have announced further sanctions to prevent the virus.
“The euro area real GDP (GDP) is only expected to recover to pre-crisis levels at the end of 2022,” Legaard said on Monday.
“The strength of the recovery depends on the success of the Kovid-19 epidemic’s development and prevention policies,” he said.