Lower for longer: The case of the ECB

- Simple forecast-based reaction function matches ECB decisions quite well until 2014.
- Forecasts of professional forecasters imply better fit than ECB staff forecasts.
- Starting in 2014 ECB has eased policy more aggressively.
- Indicates a “lower for longer” approach near zero interest rates.

Research has suggested that monetary policy acts asymmetrically near zero interest rates. We match past ECB decisions with a simple forecast-based reaction function. The policy easing that started in 2013 has led to a deviation indicating a “lower for longer” approach.