Strategy Revision – The ECB remains dovish

The ECB is currently reviewing its monetary policy strategy, with results set to be published in the second half of the year. Two topics are currently in focus, which we will discuss here:

Symmetric inflation target, asymmetric response

In its 2021 strategy review , the ECB changed its inflation target from "close to, but below 2%" to a symmetrical target of exactly 2%. Symmetry in this context means that the ECB considers deviations from this target value downwards as undesirable as those upwards. However, in order to achieve this symmetrical target, the ECB envisions an asymmetrical use of tools. Against inflation that is measured to be too low relative to the 2% target, the ECB plans to act more forcefully than against inflation that is too high. This is because interest rates cannot be lowered indefinitely, and the ECB sees the risk that beyond a certain point, interest rate policy becomes ineffective and a deflationary downward spiral threatens. To prevent this, unconventional monetary policy tools such as broad-based bond purchases (Quantitative Easing, QE) are necessary, as stipulated by the ECB, which it conducted from 2015 to mid-2022 with a total volume of 5 trillion euros in bonds. From the ECB's perspective, an asymmetrical use of tools is necessary to achieve a symmetrical target.

These bond purchases have faced considerable criticism. ECB Governing Council member Schnabel often expressed concerns about the associated risks and questionable success, critiquing the, in her view, overly casual use of this monetary policy instrument. In her speech on November 14, 2024, she demanded that the threshold for QE should be higher than in the past. For the activation of a substantial asset purchase program, there must be a clear threat to medium-term price stability. Her statements can definitely be interpreted as a call to examine and potentially adjust this point within the framework of the new monetary policy strategy.

For full text see attached PDF-Version.