Did the European Central Bank and the Bank of Canada rashly jumped the gun?
This week’s milestone G7 interest rate cuts dispel any notion that hitting 2% inflation targets spot on is a precondition for central bank moves or indeed sensible - and may guide thinking on the Federal Reserve and Bank of England too.
But the timing also reveals the degree of latitude central banks see around what might appear like precise targets - and how getting inflation to within one-tenth of one percentage point of a fairly arbitrary goal may be a fool’s errand anyway. That’s especially so if - as their own forecasts and financial market pricing seems to suggest - the risk of a significant re-acceleration of inflation is seen to be low.
The ECB and BoC were at pains to stress this week that the first cuts don’t necessarily presage a series that would wipe out monetary restriction altogether and they continue to monitor everything from sectoral price pressures to wage developments.But restriction aside, central banks’ formal targets themselves are not always as rigid as they seem either.
For 18 years, the ECB used to have a target to get inflation “below but close to 2%,” but its 2021 strategy review adopted a more symmetric target around 2% “over the medium term” - which at the time was aimed at addressing years of undershoot and acknowledging that an averaging over the time was better.
However, the U.S. central bank preceded the ECB in a shift of strategy in 2020 toward long-term averaging of inflation in assessing its target.
Bank Target Policy Rates Ecb Time Week Bank Of Canada ECB Bank Of England
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