ECB Adopts Comically Belabored, Three-Part Rates Guidance

Following the bank’s policy review and the adoption of a symmetric inflation target of 2% (an ostensible improvement compared to the old guidance, which was considered too weak and too vague), the ECB unveiled new language Thursday designed to complement the shift.

The revised forward guidance was necessary in order to “underline [the bank’s] commitment to maintain a persistently accommodative monetary policy stance to meet its inflation target.” Christine Lagarde last week cryptically suggested the July meeting would produce “some interesting variations and changes,” as she put it. Policymakers, she told Bloomberg, need to “demonstrate persistence.”

On a first read, the new guidance is — how should I put this? — belabored. In all likelihood, that reflects a lack of consensus at the Governing Council around exactly how to convey their commitment to achieving the new target. The new language reads as follows:

The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realized progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilizing at 2% over the medium term. This may also imply a transitory period in which inflation is moderately above target.

So, overshoots will be tolerated. And they’ll be “transitory.” And the ECB now aims to push inflation to 2% sooner rather than later vis-à-vis the forecast horizon, and keep it there over that period. In addition, the GC wants evidence (not forecasts) to support the notion that inflation will stay at 2% over the medium-term.

I suppose you could call that “robust.” A less generous interpretation would be to call it convoluted. Or, perhaps more aptly, you might just say that it sets a high bar, thus providing the ECB with any number of excuses to persist in accommodation. There are three parts (at least) to that guidance:

1. Inflation has to get to 2%. And soon
2. It has to stay at 2% over the forecast horizon
3. And the underlying trend in realized inflation needs to be robust enough that policymakers judge it likely to hold up

I’ll go ahead and venture that this opens the door to all manner of interpretations. It will make it virtually impossible for market participants to declare “mission accomplished.”

The ECB will always have an “out” — that is, they’ll always have plausible deniability if they want to keep easing, barring a scenario where inflation materially overshoots for a prolonged period, an outcome which seems exceedingly far-fetched considering Europe arguably succumbed to Japanification years ago. As one commentator put it: “The message is one of perma-easing.”

Speaking of that, the PEPP guidance was unchanged. So, the “significantly higher pace” of purchases (versus Q1) will continue at least through the end of this month. All other aspects of policy were unchanged as well. Or “confirmed,” in the GC’s preferred parlance.