ECB Raises Inflation Target to 2% for the First Time in 20 Years

Overcoming the COVID-19-Induced Economic Recession
Official Acceptance of Temporary Price Increases

Christine Lagarde, President of the European Central Bank (ECB)
[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Suhwan] The European Central Bank (ECB) has decided to raise its inflation target to 2% through a strategic goal revision for the first time in nearly 20 years. This is interpreted as an official acceptance of temporary price increases that may occur during the process of overcoming the economic recession caused by the COVID-19 pandemic.

On the 7th (local time), Bloomberg News reported, citing officials, that the ECB will announce a new strategy raising the inflation target to 2%.

The new standard is an upward revision from the previous target of "below but close to 2%." Regarding this, Bloomberg analyzed, "Through the new strategy, ECB officials will be able to secure legitimacy to continue quantitative easing policies."

Previously, the inflation benchmark was set in 2003, when responding to high inflation was the top priority, so the inflation target was set accordingly.

However, due to aging populations in Europe and factors such as globalization and digitalization naturally suppressing price increases, the justification for maintaining the existing inflation benchmark disappeared. Additionally, as the need to induce temporary price increases for economic recovery after COVID-19 was raised, voices calling for the inflation benchmark to be made more realistic also emerged.

There was also an evaluation that the existing inflation benchmark was somewhat ambiguous and caused confusion in the market. The reason was that the standard of "below but close to 2%" was not specific.

In particular, the ECB repeatedly signaled that it would tolerate a temporary inflation rate exceeding 2% by the end of this year, which critics say only increased market uncertainty by exceeding the originally set inflation benchmark.

As a result, voices within the ECB demanding a realistic adjustment of the inflation benchmark emerged, and it is analyzed that this content is included in the newly revised strategic goal. Isabel Schnabel, ECB Executive Board member, also predicted an upward revision of the inflation benchmark on the 3rd, stating that policymakers need to tolerate temporary price increases to enhance the effectiveness of economic recovery policies.

Meanwhile, Christine Lagarde, ECB President, has been promoting the first major strategic goal revision since 2003 since January last year, and has announced changes in fiscal policy reflecting climate change response, globalization, and raising the inflation benchmark.

The ECB is scheduled to announce the revised strategic goal with these contents at 1 p.m. (local time) on the 8th.

This content was produced with the assistance of AI translation services.