The ECB will review its monetary policy with new president Christine Lagarde at the helm. It's expected that the central bank will complete its evaluation at the end of this year. Bas Jacobs, Sijbren Cnossen professor of public economics at Erasmus School of Economics, hopes the inflation target will be raised, but is doubtful this will actually happen.
An unconventional policy
The ECB responded to the 2008 credit and euro crises by significantly lowering the official interest rate, which meant that banks could borrow money for free and had to pay 0.5 penalty interest over the money they stored at the central bank. The ECB has also started buying up bonds worth 20 billion each month since November 2019.
Professor Jacobs says it's a good thing that the ECB is reviewing the policy. According to him, it isn't working well and due to the very low interest rate, the ECB doesn't have many options to respond to a potential new recession. He hopes the central bank will raise its inflation target, and in case it credibly communicates such an increase to consumers, the inflation rate will increase as a result of consumers' expectations.
Nominal interest should also increase
The current inflation target is one that is lower, but close to two percent. Consumers will expect that the ECB will take action against increased inflation when it seems to surpass the two percent. If consumers think that the ECB will only take action at a higher rate, this could mean that the inflation rate can increase.
This would mean the nominal interest rate (interest minus inflation) can be increased. This is important, because the current low interest rate doesn't leave much room for the ECB to respond to potential crises.
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Read the full article on rtlz.nl (in Dutch). 27 January 2020.
