ECB Chief Economist Philip Lane explained a a blog post the three key conditions for lifting interest rates, as reflected in the latest forward guidance.
The first condition “until we see inflation reaching two per cent well ahead of the end of our projection horizon” provides reassurance that the convergence of inflation towards the new target should be sufficiently advanced and mature at the time of policy rate lift off. It helps to “hedge monetary policy against the risk of reacting to forecast errors”.
The second condition expects inflation to stay at 2% “durably for the rest of the projection horizon”. It “telegraphs that reaching the inflation target should be lasting.”
The third condition “progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term” signals that policy rates should not be lifted unless underlying inflation is also judged to have made satisfactory progress towards the target.
Lane further explained that “underlying inflation” is a broad concept and refers to the persistent component of inflation that filters out short-lived, reversible movements in the inflation rate and provides the best guide to the medium-term inflation developments
Also, the sentence that the forward guidance “may also imply a transitory period in which inflation is moderately above target” makes explicit that rate forward guidance that is committed to avoiding premature tightening.
