When “medium term” becomes “open-ended”

The WSJ is kind to assure everyone that the “ECB Ready to Act if Inflation Misses Target”:

The European Central Bank is ready to take action if inflation rates fall too far below its forecast, Ardo Hansson, the governor of Estonia’s central bank and a member of the ECB’s Governing Council said in an interview with The Wall Street Journal Wednesday.

What are the ECB forecasts?

The most recent forecasts, issued in March, project inflation rates of 1% this year, 1.3% in 2015 and 1.5% in 2016. Annual inflation was 0.5% last month, the lowest for more than four years. The ECB targets inflation of just below 2% over the medium term.

Any sensible person would already have seen that the (medium-term) target not only  has been grossly missed but keeps moving in the wrong direction! To save face, even while prolonging the suffering, now the “target” is the “forecast”! I wonder what they will say in 9 months’ time when the 1% forecast is missed on the downside.

Funny to observe in the chart that whenever inflation goes above the “medium term” target, even if it´s because of a negative supply (oil) shock, the ECB is quick to increase the policy rate. Like Hercule Poirot, they should favor symmetry.

Open ended

One thought on “When “medium term” becomes “open-ended”

  1. But 2016 EZ inflation expectations remain very “well-anchored” at just under 2%, even though 2014 and 2015 expectations have proved more downwardly dynamic. Interesting to see the ECB’s own expectations for 2016 have now shifted.

    I am beginning to think these “anchor” metaphors should be extended, don’t anchors stop boats moving? And can sink the boat if the tide rises too high? Or sink the boat down if the anchor is too heavy?

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