Despite the European Central Bank’s efforts, they are finding it difficult to raise their inflation to the target 2%. Their low inflation since 2013 has resulted in little to no price growth which is worrisome for the EU. The ECB has tried many different monetary policies such as record low interest rates, providing cheap funding for banks, and 2.6 trillion euros worth of bond purchases in an attempt to stimulate the economy and raise inflation. However, none of these attempts seem to be having any effect on inflation. Rehn, a potential candidate to succeed ECB’s current president, has stated, “Should this phenomenon prove to be lasting, it would imply a weakening of the impact monetary policy exerts on inflation via aggregate demand.” This weakening impact will be damaging to the ECB’s credibility as well as future influence if it continues. On top of these concerns, the European Central Bank’s board is going through large changes this year with over a third of the Governing Council due to be replaced this year. This will present interesting challenges for the ECB and their policies.
Typically, we hear stories about inflation becoming too high and monetary policy being used in an attempt to decrease inflation. I thought it was interesting that the ECB has been trying to raise their inflation for many years. With them running out of options and policies, I think it will be interesting to see what their next move is. It was mentioned that this would require a review of the tools and assumptions used to implement monetary policy.
Link: https://www.reuters.com/article/us-ecb-policy-rehn/ecb-must-rethink-policy-framework-after-failing-to-lift-inflation-rehn-idUSKCN1QW16E
2 comments:
Due to the changes the European Central Bank is going through, it is not a far stretch to assume there will be shifts in policies in the future, and hopefully these changes can be enacted quickly and efficiently. With declining trust in central banks and what effects they are perceived to have on inflation rates, along with the other factors you mentioned, control seems to be slipping away from the ECB especially as they run out of options. After not being able to raise to their inflation target after so long, reevaluating the current measures the are using is certainly a good first step before new members are incorporated into the Governing Council.
I agree it’s very interesting to see that none of the ECB’s polices worked for encouraging increasing inflation. Having this continuous low inflation rate makes business and people more willing to delay investment and capital spending. Therefore monetary policy alone may not be able combat a possible lack of demand in the economy. Without an increase in inflation nominal wages may not be able to increase which can lead to higher unemployment but price stability may be easier to maintain.
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