The normal thing for a central bank is to establish its monetary policy based on the inflation forecasts it manages. To do this, the money lords use a whole range of different tools that help them establish a framework with possible future inflation scenarios, and adjust their monetary policy (interest rates, bond purchase programs…) as they consider necessary to that inflation approaches its objective. However, in recent years large central banks such as the European one, or the US Federal Reserve, have had to put aside the forecasts, to focus on what is urgent: fixing an inflationary rebound that they were not able to anticipate, and that put in doubt its credibility. Since then, the ECB has been focused on moderating inflationary pressure, but the crisis is already subsiding, and with greater confidence that its objective is almost met, Philip Lane, the ECB’s chief economist, is already considering returning to the approach. classic and recover a monetary policy marked by future expectations and forecasts.
The inflationary emergency already seems to be under control, and therefore the ECB is already preparing to return to the usual way of monitoring inflation: in the long term. Before the pandemic, the central bank had a clear focus, and this was based on monitoring long-term inflation forecasts, and all leading price indicators in order to understand where they were going, and thus be able to calibrate monetary policy accordingly. consequence. However, with the spikes in inflation that occurred starting in mid-2021, the ECB was forced to run after price increases, and to make its decisions focusing on the consolidated data that was being published.
Now, Philip Lane believes that “once the disinflation process is complete, I think the time has come for monetary policy to look ahead, and scan the horizon to analyze which shocks can generate more or less inflationary pressures,” he confirms. the ECB’s chief economist in an interview with the Financial Times. No more looking back: the central bank will look again at future indicators, and these increasingly look better for the interests of the ECB.
This change in the way of analyzing the inflationary context and acting will occur, in Lane’s opinion, at some point next year, when the ECB has announced that it expects inflation to return to its sustainable 2% objective, medium term. Thus, it will be in 2025 when the organization resumes the way of conducting monetary policy that existed before the Covid crisis. “At some point we will make the transition from the inflationary challenge we have suffered to the new challenge of keeping the CPI at 2% in a sustainable manner,” explains Lane.
Inflation expectations confirm the victory of the ECB
As of today, inflation is still running at a rate higher than the central bank’s target. In November the price indicator remained at 2.3%, a figure that contrasts with the more than 10% that was reached in 2022, at the worst moment of the last inflationary crisis.
However, if we look at the leading indicators that the ECB is now putting back on the table, victory over inflationary pressures seems a done deal. In the last few days of the market, the ‘5y5y’ inflation swap, which measures the markets’ expectations for inflation in the five years that will begin in 5 years, has already fallen below the ECB’s target, something that is not It has been happening since August 2022. The swap now stands at 1.8%, a figure that confirms the success of the ECB and cements the point of view that Lane is now anticipating for next year.
Although the ECB still maintains a cautious approach, and does not want to venture to give guidance on its future rate movements, there are already members who are beginning to open the door to more aggressive cuts in the price of money than normal. Martins Kazaks, member of the Governing Council of the ECB, declared this Monday that a stronger rate cut than normal will be discussed, which anticipates a possible movement of 50 basis points at the December meeting. “We see that the inflation problem is going to end soon, and that means that we will be able to lower rates,” Kazaks indicated, but he also remembers the current situation of uncertainty, so the policy change cannot yet be confirmed. monetary that Lane proposes. Everything indicates that it will be in 2025.
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