Not only in fiscal policy – with the start of the recovery plan – but also in monetary policy, the pigeons beat the hawks. The priority to growth and investment, low interest rates and fiscal and monetary stimuli are imposed.
The new monetary strategy approved on the 8th by the ECB marks its second re-foundation, after the one undertaken by Mario Draghi prioritizing the fight against the Great Recession. He lowered rates and launched massive purchases of assets, public and private, despite the brakes of the Bundesbank and the German Constitutional Court and the attacks of the local far right … and Donald Trump.
The new objective of the ECB corners that of an inflation below “but close to 2% in the medium term”. Although the draghism it broke it in fact, that corset was restrictive: asymmetrical, it impelled to act more when inflation rose than if it fell.
Now 2% is targeted as “a symmetrical objective, that is, deviations from it are equally undesirable.” Expansion already enjoys constitutional equality with restriction.
It also obtains a more favorable legal mandate: that of a “particularly persistent” performance when rates, as now that they are negative, are on their low ground. The objective is always 2%, the policy will differ in intensity, since it is more automatic to lower high inflation (applying high rates) than to raise it.
“This may also imply a transitional period in which inflation is moderately above the target,” says the ECB. The pigeons win, 2% is not an insurmountable ceiling. As they won when the Federal Reserve established “to aspire to achieve an inflation that is an average of 2% over time”, on 8-27-20.
Attention to phrasing. For Frankfurt, overflow is a possibility; for Washington, a purpose. It is this nuance – of result, not of obligation – that has finally inclined the European hawks to complete the unanimity of the decision. They give their arm to twist, justifying to their public – many savers suffering from low rates – that acquiescent resignation does not imply militant enthusiasm.
The timing was key. Even temporarily, inflation in the euro area exceeds 2%; and in the US, 5%. It was necessary to counteract the agitation of the ultras who demanded to raise rates (with the consequent ruin of the most indebted countries).
Concessions to austerity to incorporate housing into the inflation index (which will increase it) and to remember that the first monetary instrument is the management of the interest rate (above quantitative expansion) are, in practice, rhetorical. That of the house, because it will take years to agree on an approved calculation. That of the types, because they already are.
Now there is the battle of concretion. Bet on this thesis: on the 22nd, the Governing Council of the ECB will approve the promise (forward guidance) of keeping rates very low for a long time, hopefully beyond 2023. Perhaps only by majority.