The subject of the inflation target is returning to the markets once in a while. This is mainly due to the fact that since the financial crisis, that is for a decade, even despite the huge central bank operations, it has not been possible to permanently restore price growth in the global economy.
Earlier, the Fed was discussing a change in the inflation target, and now this issue appeared in the European Central Bank. All because of the definition of the inflation target in the mandate of the ECB. It says that inflation should stay below, but close to 2 percent. Currently, there is no symmetry of the inflation target here. For example, the inflation target of the National Bank of Poland is 2.5 percent with a deviation up or down by 1 percentage point.
According to the latest information, work on examining the potential change in the inflation target was to begin at the European Central Bank. The main intention of such a decision is adding a phrase that also inflation could be slightly above 2 percent. Thanks to this it would be possible to keep low interest rates for a long time. Even if prices started to rise at a rate slightly above 2 percent, inflation would still be in the target, which would not exert any pressure on interest rate hikes. Meanwhile, now inflation above 2 percent would mean greater chances for monetary tightening.
The above information has not yet been officially confirmed, but it can be assumed that this is another element that the central bank could introduce into its policy, because the current inflation targets were introduced a long time ago, and the times have changed.
What could be the consequences of changing the inflation target? First of all, higher negative real interest rates for society, which is what we are currently observing in Poland. Negative real rates discourage saving and encourage consumption. It is also theoretically good information for the valuation of shares, which low interest rates can favor.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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