The European Central Bank sets a new inflation target and its possible effects on monetary policy will be the key topic of this week’s meeting in Frankfurt. The hopes are high that the euro zone’s central bank will come up with a dovish surprise as President Christine Lagarde keeps stressing the need for a forceful policy response to avoid a de-anchoring of inflation expectations.
Lagarde said that they recognize very specifically that the proximity to the effective lower bound requires forceful or persistent monetary policy action. The European Central Bank hiked its inflation target from below but close to 2% to a symmetric 2% target over the medium term, which means that both overshooting and undershooting is allowed but not desirable.
Anatoli Annenkov of Societe Generale said that the key message could thus be that there is no rush to signal tighter policy, even at the September/October meetings. We expect a better understanding of the possible end of the crisis phase of the pandemic late this year, suggesting that the key decisions on PEPP may only come then.European Central Bank put forward an emergency bond-buying program in March of 2020 to deal with the economic shock from the pandemic. This program, known as the PEPP, is currently set to last until March 2022 and total up to $2.2 trillion.