EXCLUSIVE-ECB officials fear going the Fed’s route on inflation: sources

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EXCLUSIVE-ECB officials fear going the Fed's route on inflation: sources




Archive image of the European Central Bank (ECB) headquarters in Frankfurt


© Reuters/Ralph Orlowski
Archive image of the European Central Bank (ECB) headquarters in Frankfurt


By Francesco Canepa and Balazs Koranyi

FRANKFURT, Oct 12 (Reuters) – There is reluctance among European Central Bank officials to follow the Federal Reserve’s path of targeting an average inflation rate, as they fear it could leave their hands tied, ECB sources told Reuters involved in the review of monetary policy.

The four ECB sources, which include members of the hard and moderate wings of the body’s governing council, also expressed doubts about whether the orthodox theory of inflation still applies in economies where prices have long stagnated despite the fact that interest rates are close to or below zero.

After failing to meet its target of keeping inflation “below but close to 2%” for a decade, the ECB is reviewing its strategy following a similar Fed move and when a pandemic-generated recession pushes inflation in the area euro into negative territory.

Analysts had expected the ECB to follow the Fed, which said in August that it would target an average inflation of 2% for a non-specific time, so that periods when prices move too slow are offset by times of faster increases and vice versa. .

But ECB officials who spoke to Reuters fear that going this route creates the risk of encouraging financial markets to make the wrong conclusions about future monetary policy decisions based simply on where the average will be at any given time.

Instead, they want to maintain the flexibility to judge each situation on its own merit, such as by minimizing the importance of temporary changes in inflation due to movements in oil prices.

“We want flexibility, so an average goal would not really give us a benefit,” said one of the sources.

An ECB spokesman declined to comment.

With eurozone inflation averaging 1.3% over the last decade and currently negative, they also fear they are setting the bar too high by explicitly committing to go above 2% long enough to make up for time below target. .

“You don’t want to create expectations that you can’t meet,” said another source.

Most of the ECB authorities who spoke to Reuters favored a more general definition, in which the inflation target is set at 2% over an unspecified medium term. That would remove the definition “below but close to” that has led observers to believe that the bank would prefer to see prices below 2% rather than above that level.

(Edited in Spanish by Manuel Farías)

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