ECB won’t go as far as Fed with average inflation aim

Following its strategic review, we think the ECB will set its formal definition of price stability as an inflation rate of 2%. But it might also adjust its forward guidance to signal some tolerance for a brief period of overshooting 2%. With domestically-generated inflation likely to remain weak for a long time, we think the ECB will need to keep monetary policy loose for longer than investors anticipate.

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