The European Central Bank took a step in the Federal Reserve’s direction with its new inflation target of 2%, while stopping short of a similar commitment to let the economy run hot after a recovery.
In announcing the results of its own long-running strategy review on Thursday, officials in Frankfurt said their new simpler approach “may also imply a transitory period in which inflation is moderately above target.” That contrasts with an explicit commitment from their U.S. counterparts to aim for a rate above its target after a period of weakness.
“Are we doing average inflation targeting like the Fed? The answer is no, very squarely,” ECB President Christine Lagarde said in a news briefing. “There are multiple ways to deal with the effective lower bound,” she said, referring to interest rates that are so low that central banks risk running out of ammunition.
The Fed last year decided to pursue an “average” 2% target, meaning it will let inflation overshoot during an economic upswing to make up for past shortfalls. The ECB decided to move away from its old goal of “below, but close to, 2%,” which was seen as vague and was drafted at a time when excessive price pressure was the main concern, not the opposite, as has been the case in the euro area in recent years.
The difference between the two central banks “is important,” said Carsten Brzeski, an economist at ING in Frankfurt. “You’ll get more extreme monetary policy in the U.S.”
The FTSE MIB climbed up by1.67% to 25,052.82. In the cash markets, the DAX futures Germany was trading up 1.73% to 15,687.17. CAC 40 futures in France rose by 2.07% to 6,529.60 while the FTSE 100 futures in the U.K. were up by 1.30% to 7,121.88. ,at the time of writing.