Upping The Ante

Image source: Dugger94621 - Shutterstock

What's going on?

The European Central Bank (ECB) raised its inflation target on Thursday in a high-stakes gamble on the future health of the continent’s economy.

What does this mean?

For the past 18 years, the ECB’s aimed for annual price rises to come in “below but close to 2%” – an objective it’s undershot for almost a decade. Now, however, Europe’s central bank is opting for a more tangible target of 2% flat. That’s a slight escalation on paper – but may be greater in reality, given that the ECB has said it’ll allow inflation to overshoot when economic conditions require it.

The increase allows the Bank to carry on with its current policies of ultra-low interest rates and ultra-large bond buying, supporting the European economic recovery even if that means higher inflation in the short term. But Thursday’s strategic shift went deeper: the ECB is also sharpening its focus on climate change, including by taking into account sustainability criteria when purchasing company bonds (tweet this).

Why should I care?

For markets: Infectious? Hold ‘Em.
The prospect of more quantitative easing and lower rates for longer helped European government bonds rally on Thursday. But investors also fled to their relative safety as stock markets sank on fears that fresh restrictions to counter the fast-spreading Delta variant of coronavirus could take the shine off the global economic recovery.

The bigger picture: Casino Royale.
The world’s major central banks are at sixes and sevens over how to withdraw extraordinary economic support measures introduced at the height of the pandemic. The ECB gave no indication as to when it’ll start raising interest rates again – but the US central bank reckons it’ll have increased them twice by 2023. China, meanwhile, hinted earlier this week that it may soon reduce the amount of cash its banks have to keep in reserve, boosting local lending. The big risk for the ECB is that it’s caught out by another economic hiccup before things get back to normal.

Originally posted as part of the Finimize daily email.

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