The new year at the ECB marks the conclusion of the transition to new leadership, with two new members joining the Executive Board, and the launch of a year-long strategy review.
As expected, the quantitative definition of the inflation objective will be the focal point of the review. We think this may include consideration of ‘average inflation targeting’. This approach would take into account past inflation outcomes as well as the future, requiring a period of above target inflation to compensate for time spent below target. With inflation (and inflation expectations) remaining well below the ECB’s target—if adopted—this policy stance would cement our expectation for policy to remain accommodative for a protracted period of time.
The ECB will also take into consideration a broader range of topics than the central bank’s prior review, such as financial stability and green policy objectives.