- The ECB is upbeat on the growth outlook but considers that inflation remains subdued
- Nevertheless, it still expectsinflation to rise to 1.7% in 2020
- The refusal to label this as being sufficiently close to its objective reflects a cautiousattitude as well as an effort of being vague for a good reason
For the very same reason that other key word is not defined either: “well past”. Current policy rates will be maintained well past the end of QE. The refusal to provide a definition is again based on the idea of avoiding to tie one’s hands, to precommit based on data thresholds or a specific date. Investors may feel left behind empty-handed: although risk and uncertainty generate the extra return over and above the risk-free rate they strive for, they hate uncertainty so in their dreams guidance is clear and “close” and “well past” are precisely defined. However, such a dream could end up in a nightmare: the environment might change forcing the central bank to renege on its earlier guidance. Investors would wake up with a headache and volatility would increase structurally because everybody would understand that firmly stated guidance is of little value in a world which is rife with “known unknowns”. Out would go the credibility of the central bank. At the end of the day, guidance should be sufficiently clear whilst remaining…sufficiently vague. It's in the interest of the speaker (the central bank) and his audience (markets).