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What will the ECB do if core inflation remains around 1%?
Growing labour market pressures are not driving up core inflation in the euro zone because of a weak Phillips curve effect (the effect of unemployment on labour costs) and weak pricing power. Core inflation could fall even lower were the euro to appreciate . What will the ECB do if core inflation remains around 1%? It co uld retain its inflation objective and then decide that it should hold its key interest rate at zero . I ncidentally, this is not leading to considerable financial imbalances for the time being; It could decide that it is not acceptable or that it is too dangerous to keep interest rates at zero and change its objective so as to be able to raise interest rates ( switch to a cyclical position or nominal growth objective). The ECB is so attached to the inflation objective and its communication has been highly focused on its inflation target that the euro repo rate would probably remain at zero if core inflation did fail to pick up.
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Patrick Artus
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