“The ECB today announced its new monetary policy strategy, where they redefined their inflation aim as a 2% symmetric target versus the previous definition of “close to but below 2%”, which came across more like a ceiling at 2%. While ECB President Christine Lagarde pushed against the average inflation targeting label, the framework announced by the Federal Reserve in the US last summer, the ECB will tolerate a period of moderate inflation overshoots to meet its inflation target medium term.
The reaction in financial markets has been limited so far as ECB didn’t clarify the extend of a “moderate overshoot” and the time frame they would be comfortable with or if they were ready to introduce further flexibility in the use of their monetary policy tools. There was also no indication of any make-up strategies to offset the long period of inflation misses in the past. In line with the feedback they received from the public via their ‘ECB Listens’ events, the central bank also introduced a climate change action plan and a new housing cost component within the inflation index, which is expected to increase inflation prints in coming years.”