Macroscope | Maybe central banks will declare victory and go home
Politicians endowed central banks with supposed powers far beyond their grasp
Wars don’t always end with treaties; developments at the European Central Bank show how the war on low inflation may end when the loser declares victory and goes home.
ECB chief Mario Draghi on Thursday vowed a strong defence of the bank’s 2 per cent inflation target, a goal it and other central banks have been signally unable to meet.
Giving a nod to both dropping energy prices and to continued falls in market-based measures of inflation expectations, Draghi, speaking after the ECB left interest rates on hold, with one hand worked to downgrade expectations of inflation while with the other suggested strong action.
“So now these conditions have worsened and I think the credibility of the ECB would be harmed if we were not ready to review and possibly reconsider our monetary policy stance when we will have full information,” Draghi said in remarks indicating that further loosening is a very live possibility at the next ECB meeting in March.
Stressing there were “no limits” on the scope of ECB actions, if within its mandate, Draghi also called, yet again, for support from fiscal policy and structural reform.
What’s remarkable is not that Draghi is talking about further measures – after all he and his predecessors have been doing this for years, all the while watching inflation fluctuate below the 2 per cent target. Euro zone inflation now stands at 0.2 per cent and, given energy prices, will soon fall into negative territory.