ECB considers allowing inflation overshoot: Lagarde

Bloomberg

European Central Bank (ECB) President Christine Lagarde said it’s worth examining a Federal Reserve-style strategy that allows for inflation to temporarily rise above the institution’s target.
A policy under of committing to make up for low inflation after missing the goal for a while “could be examined,” as part of the institution’s strategic review, Lagarde said at a conference in Frankfurt on Wednesday.
“If credible, such a strategy can strengthen the capacity of monetary policy to stabilize the economy when faced with the lower bound,” she said. “This is because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates.”
Lagarde’s remarks are arguably the strongest signal yet that the ECB will change its goal, after falling short of the target of “below, but close to, 2%” for years despite massive monetary stimulus. While the president said she wasn’t presenting any conclusions, she noted that structural factors such as globalisation are keeping inflation subdued.
The Frankfurt-based central bank started its first comprehensive review in almost two decades late last year, before it was delayed by the coronavirus pandemic. It covers a wide range of topics including the inflation goal as well as climate change and digitisation.
The Fed agreed earlier this year to start targeting an average inflation rate of 2%, giving it room to overshoot to make up for earlier underperformance. That suggests it’ll probably keep US monetary policy looser for longer.
Bundesbank President Jens Weidmann urged policy makers to be careful in making changes to the ECB’s strategy, and repeated his warnings that large-scale bond purchases could blur the line between monetary and fiscal policy.
The record recession caused by the outbreak has compounded the challenge. Germany, Europe’s biggest economy, reported the steepest decline in consumer prices in more than five years.
Lagarde acknowledged that euro-area prices will decline in coming months, but says they should turn up again in early 2021. That may not be sufficient for some policy makers, who started to prepare the ground for more monetary stimulus.
Executive Board member Fabio Panetta has argued that the risk of delivering too much stimulus is smaller than being “too shy,” and Bank of Spain Governor Pablo Hernandez de Cos has said weak price pressures show there is “no room for complacency.”
Estonia’s Madis Muller said in Tallinn on Wednesday that the economic recovery will slow.
The ECB has already pledged to buy as much as $1.6 trillion in government bonds and other assets under a pandemic emergency program, and is widely expected to announce a boost by the end of the year.
The central bank’s latest projections shows inflation averaging only 1.3% in 2022, far below its goal of just under 2%. The appreciation of the euro this year is making the task more difficult by weighing on import prices.