How the ECB’s New Inflation Goal Will Shape Economy

The European Central Bank has adjusted its sights for the first time in 18 years. The central bank for the 19 countries that use the euro has raised its goal for inflation, and acknowledges that price increases might exceed that target for a while. It’s an attempt to address shortcomings in the ECB’s armory in a region where economic performance was lackluster even before the Covid-19 crisis. The move also echoes a shift by the U.S. Federal Reserve following a decade in which extraordinary monetary policy did little to spur inflation.

The ECB’s inflation target since 2003 had been “below, but close to, 2% over the medium term.” Now, 2% becomes the actual target and is no longer an upper limit. The ECB said it will seek “symmetric 2% (inflation) over the medium term” -- meaning that too-low and too-high price growth are equally undesirable. It also said that when interest rates are about as low as they can go, it will need to be “especially forceful or persistent” with monetary stimulus, which could “imply a transitory period in which inflation is moderately above target.”