NN IP: ECB’s Strategic Review leaves markets vulnerable to volatility

NN IP: ECB’s Strategic Review leaves markets vulnerable to volatility

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The European Central Bank’s adoption of a 2% symmetric inflation target over the medium term will not be very effective in raising inflation expectations and re-anchoring them to the new target. The most significant reason for this is that the ECB fails to demonstrate how it plans to meet this target after massive monetary expansion, which proved to be  ineffective in attaining the previous lower target of ‘below 2%’.

The ECB stated in its recent Strategic Review that it may allow a “transitory period in which inflation is moderately above target”, but this is not a convincing pledge, NN Investment Partners’ (NN IP) economists believe.

Willem Verhagen, Senior Economist Multi-Asset at NN IP: 

“It is very clear that the hawks and doves interpret this phrase differently. The hawks feel that an accidental inflation overshoot which is expected to reverse itself does not require monetary policy tightening. This is already established ECB practice. By contrast, the doves will try to use this phrase as a justification to aim for a Fed-style inflation overshoot. The real battle between the hawks and the doves that will determine exactly how the ECB’s policy stance will change because of the Strategic Review still lies ahead. The market thus still faces a considerable degree of uncertainty about future ECB policy that could well be a recipe for volatility.”