MNI BRIEF: Rate Guidance First Step In ECB Policy Shift - Lane

July's revision of interest rate forward guidance is just the first step taken by the ECB in implementing its new monetary policy strategy, chief economist Philip Lane wrote in a blog post Thursday, as he highlighted the role asset purchases and longer-term refinancing operations will continue to play when nominal interest rates are close to the lower bound.

The requirements that inflation should be seen to converge towards the new 2% target well ahead of the ECB's projection horizon implies that it should by "sufficiently advanced and mature at the time of policy rate lift off," Lane explained, while the condition that it should do so "well ahead of the end of the projection horizon" helps to hedge against the risk of reacting to forecast errors.

The condition that inflation should also reach two per cent durably for the rest of the projection horizon" indicates that it should be lasting and not just be the result of short-lived forces that lead to one-time increases in prices, he continued. Policy rates should not be lifted unless underlying inflation is also judged to have made satisfactory progress towards the target. "Underlying inflation is not proxied by any single indicator," Lane wrote. "it follows that some judgement is required both in terms of the choice of indicators and the assessment of their signals."