Forceful or Persistent: How the ECB's New Inflation Target Affects Households' Inflation Expectations

The ECB announced a new monetary policy strategy in July 2021. In contrast to the previous strategy of aiming at inflation close to, but below 2%, it now pursues a symmetric 2% inflation target over the medium term. In addition, the ECB explicitly indicated some tolerance for above-target inflation to avoid low inflation from becoming entrenched. The main goal of this added clause was to lift private-sector inflation expectations in times when policy is constrained by the effective lower bound of interest rates. In this brief, we assess whether the new strategy had the intended effects. Using a representative survey of German individuals conducted just after the introduction of the new strategy, we find that respondents make little difference between the previous strategy of targeting inflation close to but below 2% and the new symmetric 2% inflation target. However, when informed about the ECB’s increased tolerance for inflation overshooting, they expect substantially higher inflation in the following years when current inflation is running below target.

Pavlova, Lora, M. Hoffman, E. Moench and G. Schultefrankenfeld (2024), Forceful or Persistent: How the ECB's New Inflation Target Affects Households' Inflation Expectations, SUERF Policy Brief, Vienna, Austria