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FERI Economics Update December 2019 - ECB Strategy: Price Stability Is Not the Only Thing that Counts

Bad Homburg, 12/02/2019
by Axel D. Angermann, FERI
  • Discussion on monetary policy strategy has begun
  • Focus on 2% inflation target falls short
  • ECB gives unilateral reasons for its decisions

The ECB will review its monetary policy strategy in the coming years. The debate has already begun, and is currently focusing mainly on questions relating to the inflation target: Is a value of "below but close to 2%" still appropriate, or should it be replaced by a range? Should monetary policy also tolerate phases of higher inflation? Should the costs of owner-occupied housing be included in the measurement of inflation? There are initial proposals on all these issues, the pros and cons of which are likely to be discussed intensively in the coming months.

However, the discussion falls short if it is limited to these technical aspects. In the light of the experience gained in recent years, it is also appropriate to critically review the ECB's mandate and its interpretation by the central bank management. This mandate is laid down in the Treaty on the Functioning of the EU. This states that the primary objective of the European System of Central Banks (ESCB) is to maintain price stability. The sentence immediately following is much less in focus: "If this is possible without interfering with the objective of price stability, the ESCB supports the general economic policies in the Union". To date, the ECB has practically always justified its monetary policy measures on the grounds that it has to ward off threats to price stability. However, it is probably unclear to the public why an inflation rate that has been around 1.5% for a long time (as is the case in Germany) should actually be harmful.

Fed not Only Linked to Price Stability

One can try to explain the underlying interrelations better, and Christine Lagarde obviously intends to do so. But you could also take a broader view, for example at the Fed: Their boss, Powell, justified the turnaround in monetary policy in the current year primarily with external economic uncertainties, which resulted in risks for the economy. Given a stable core inflation rate of between 2% and 2.5%, threats to price stability in the USA were obviously not an issue - Fed Chairman Powell was able to simply point out that interest rate cuts served to secure a continued high level of employment.

Looking at the actions of the US Federal Reserve, the exciting question arises as to what "support for general economic policy in the EU" by the European Central Bank might look like. It is quite imaginable that the ECB could gain in comprehensibility and credibility if it were to aggressively justify certain measures with economic policy objectives. At least the text of the Treaty, which clearly states that support for general economic policies must not conflict with the overriding objective of price stability, is an obstacle to an excessive extension of its mandate - should also be discussed at least as intensively as the question of the inflation target itself.


About Axel D. Angermann

As Chief Economist of the FERI Group, Axel D. Angermann analyses the economic and structural developments of all markets that are important for asset allocation. This data forms the basis for the strategic orientation of FERI's asset investments.

Angermann has been responsible for the analyses and forecasts prepared by FERI for the overall economy and individual sectors since 2008. He joined the company in 2002 as an industry analyst. His professional career began at the Max Planck Institute for Economics and the German Chemical Industry Association. Angermann studied economics in Berlin and Bayreuth.


About FERI

Founded in 1987 and headquartered in Bad Homburg, Germany, the FERI Group has developed into one of the leading investment houses in the German-speaking area. FERI offers tailor-made solutions for institutional investors, family assets and trusts in the following areas:

•    Investment Research: macroeconomic forecasts and asset allocation analyses
•    Investment Management: institutional asset management and private wealth management
•    Investment Consulting: advisory services for institutional investors and family offices

The FERI Cognitive Finance Institute was formed in 2016. It is the strategic research centre and creative think tank of the FERI Group. The Institute focuses on innovative analyses and the development of methods for long-term oriented economic and capital market research. 

FERI and MLP currently have assets of EUR 38.1 billion under management. A total of EUR 8.5 billion of these assets are alternative investments. The FERI Group is headquartered in Bad Homburg and has offices in Dusseldorf, Hamburg, Luxembourg, Munich, Vienna and Zurich.



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Katja Liese

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Corporate Strategy, Marketing and Communications

T +49 (0) 6172 916-3192

F +49 (0) 6172 916-1192

presse@feri.de

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Rathausplatz 8-10

D-61348 Bad Homburg

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Member of the Management Board
Corporate Strategy, Marketing and Communications

T +49 (0) 6172 916-3192
F +49 (0) 6172 916-1192
presse@feri.de

FERI AG
Rathausplatz 8-10
D-61348 Bad Homburg

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Katja Liese
Member of the Management Board
Corporate Strategy, Marketing and Communications

T +49 (0) 6172 916-3192
F +49 (0) 6172 916-1192
presse@feri.de

FERI AG
Rathausplatz 8-10
D-61348 Bad Homburg

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