The wiggle room around 2% inflation targets :Mike Dolan
Repeats with no changes to text
By Mike Dolan
LONDON, June 7 (Reuters) -This week's milestone G7 interest rate cuts dispel any notion that hitting 2% inflation targets spot on is a precondition for central bank moves or indeed sensible - and may guide thinking on the Federal Reserve and Bank of England too.
The European Central Bank and the Bank of Canada, covering four of the G7 major economies, cut interest rates on Wednesday and Thursday in the first reversals of some two years of policy tightening aimed at reining in post-pandemic inflation spikes.
In well-telegraphed moves, both announced the cuts even with headline inflation rates still above 2.0% targets - 2.6% in the euro zone and 2.7% in Canada. "Core" rates excluding energy and food and other volatile prices are just as high.
Have they rashly jumped the gun?
The reasons are well documented - the central banks continue to insist the targets will be hit, they forecast success on that front over the next year or two and claim policy is being pre-emptive by removing just a notch of restraint on slow-growing economies.
But the timing also reveals the degree of latitude central banks see around what might appear like precise targets - and how getting inflation to within one-tenth of one percentage point of a fairly arbitrary goal may be a fool's errand anyway.
Many policymakers and economists doubt the wisdom of exact point targeting - citing numerous supply-side distortions in many components of inflation baskets and fretting about wider damage to economies simply in order to ring a 2% bell.
Having successfully punctured inflation rates to a quarter of the peaks seen in 2022, the risk of forcing recession and a rise in unemployment just to zap a final half percentage point seems to some an overly high price.
That's especially so if - as their own forecasts and financial market pricing EUIL5YF5Y= seems to suggest - the risk of a significant re-acceleration of inflation is seen to be low.
The debate then shifts to degrees of policy "restrictiveness" - judged mainly by how far current policy rates are above assumed "neutral" levels that would no longer bear down on or stimulate economic activity.
That in itself leaves a lot of wiggle room for most central banks.
Even if there's considerable uncertainty on exactly where those largely theoretical neutral rates lie, most experts agree they are much lower than now - allowing central banks to claim a foot's on the brake even as they pare back borrowing rates.
Estimates by ECB and BoC officials themselves, and indeed from Fed policymakers, indicate neutral policy rates have likely crept higher since the COVID-19 pandemic but they are still almost half the current levels.
The ECB and BoC were at pains to stress this week that the first cuts don't necessarily presage a series that would wipe out monetary restriction altogether and they continue to monitor everything from sectoral price pressures to wage developments.
ROOM TO MANOEUVRE
But restriction aside, central banks' formal targets themselves are not always as rigid as they seem either.
The Bank of Canada, for example, continually refers to its 2% target in public, but its most recent framework agreement with government covering the 2022-2026 period refers to the 2% target as a mid-point of a 1%-3% "inflation-control range".
As Canadian inflation has already spent some four months below the upper end of that range, it's not hard to see the green light to ease with the local economy slowing sharply.
For 18 years, the ECB used to have a target to get inflation "below but close to 2%," but its 2021 strategy review adopted a more symmetric target around 2% "over the medium term" - which at the time was aimed at addressing years of undershoot and acknowledging that an averaging over the time was better.
And even though it nudged up its 2024 and 2025 inflation forecasts a touch while cutting rates on Thursday, the ECB still expects inflation to average as low as 1.9% in 2026.
For the Fed, which holds a policy meeting next week, inflation captured by its core PCE gauge is now similar to equivalents faced by the ECB and BoC - but it's hesitating on rate cuts due to a much stronger economy and looser U.S. fiscal stance.
However, the U.S. central bank preceded the ECB in a shift of strategy in 2020 toward long-term averaging of inflation in assessing its target.
Although it's publicly sidestepped that approach during the latest battle - with its next review expected some time next year - the whole approach de-emphasizes the idea of hitting 2% precisely at any one point as the only policy trigger.
What's more, the Fed's solo 2016-2019 tightening campaign to bring policy rates back up to neutral was also conducted even when core PCE rates languished below 2% for all but two months of that period. In other words, the return to neutral policy rates then didn't require inflation to be bang on target.
That same argument could be applied in reverse now.
For investors, the bias from here will likely be more restrictive policy on average in the years ahead.
But that probably shouldn't prevent some cuts from here.
"What is not being openly discussed, certainly by policymakers, is that we might not be able to get back below 2% without a severe recession," said Chris Iggo, chair of the AXA IM Investment Institute, adding that just keeping a lid on inflation here may now see policy rates in a 3%-4% range on a longer-term basis in the U.S. and the United Kingdom and at some 2%-3% in the euro zone.
"How far above that range rates go depends on the appetite for forcing inflation back down through engineering a recession, an increase in spare capacity and higher unemployment," he wrote. "Living with inflation a little above the target range has greater social utility than the alternative."
The opinions expressed here are those of the author, a columnist for Reuters.
Graphic-The ECB and Canada join the slow crawl to cut rates https://reut.rs/4aSEnt0
Graphic-Bank of Canada cuts interest rate by 25 bps to 4.75% https://reut.rs/49CUpYc
Graphic-Euro zone inflation and ECB interest rates https://reut.rs/3RbKa5V
Graphic-Is US inflation stuck? https://tmsnrt.rs/41mXvfr
Graphic-ECB Cuts But Stays Restrictive https://tmsnrt.rs/4ed3WYE
Graphic-Inflation expectations anchored? https://tmsnrt.rs/4bQLyDe
Editing by Paul Simao
免責聲明: XM Group提供線上交易平台的登入和執行服務，允許個人查看和/或使用網站所提供的內容，但不進行任何更改或擴展其服務和訪問權限，並受以下條款與條例約束：（i）條款與條例；（ii）風險提示；（iii）完全免責聲明。網站內部所提供的所有資訊，僅限於一般資訊用途。請注意，我們所有的線上交易平台內容並不構成，也不被視為進入金融市場交易的邀約或邀請 。金融市場交易會對您的投資帶來重大風險。
所有缐上交易平台所發佈的資料，僅適用於教育/資訊類用途，不包含也不應被視爲適用於金融、投資稅或交易相關諮詢和建議，或是交易價格紀錄，或是任何金融商品或非應邀途徑的金融相關優惠的交易邀約或邀請。
本網站的所有XM和第三方所提供的内容，包括意見、新聞、研究、分析、價格其他資訊和第三方網站鏈接，皆爲‘按原狀’，並作爲一般市場評論所提供，而非投資建議。請理解和接受，所有被歸類為投資研究範圍的相關内容，並非爲了促進投資研究獨立性，而根據法律要求所編寫，而是被視爲符合營銷傳播相關法律與法規所編寫的内容。請確保您已詳讀並完全理解我們的非獨立投資研究提示和風險提示資訊，相關詳情請點擊 這裡查看。
