The wake of the coronavirus pandemic postponed the public announcement of the European Central Bank’s (ECB) first policy review since 2003. The ECB decided to revise its inflation target and "allow consumer prices to overshoot when necessary".
The most critical points: on the one hand, the medium-term inflation target, which is currently formulated as "close to, but less than, 2.0%", is replaced by a simple objective at 2.0%, which intends to be symmetrical, meaning, inflation above this figure will be as worrying as inflation below it, the ECB said recently. On the other hand, this 2.0% perceives as a target to achieve in the long term and on average. That is to say, after a long period of inflation below this level - as we have experienced in recent years - the ECB would be ready to accept a period of inflation above this target to return to 2.0% over a long period.
This new inflation target is "clear and easy to communicate", said ECB President Christine Lagarde. “We know that 2% is not going to be constantly on target; there might be some moderate, temporary deviation in either direction of that 2%, and that is okay. However, what we are very concerned about is any sustainable, durable, significant deviation from the target, and that will require forceful action”, added Mrs Lagarde.
This new strategy will be implemented following the first regular monetary policy meeting of the Governing Council to be held on July 22. This policy will be reviewed by 2025.
Already in force in the United States, such a policy offers the central bank greater flexibility, allowing it to keep its key interest rates - as well as its monetary policy as a whole - unchanged in the event of a temporary spike in inflation.
It remains to be seen whether these measures will finally enable our monetary authorities to bring inflation back to a target which has proved very illusory in recent years. With an unemployment rate that remains higher than before the pandemic, it will be nothing obvious.
What impact for bond investments and investors?
The certainty is that by offering a more flexible mandate and coping with higher inflation, the ECB is preparing to remain present on the debt markets for an extended period. It will continue to do what it can to ensure a very cheap credit for all for ample time.
As far as possible, the ECB will prevent the rise in interest rates, which is undoubtedly a good sign for the holders of debt denominated in € (euros) but also for the United States that will continue to finance themselves at a reasonable price.
Regarding the Sicav - Optimize Invest Selection investment strategy, we maintain exposure to the Eurozone (bonds and stocks). Here you can find the latest update of the portfolio allocation.