The european central bank will consider following the lead of the us federal reserve by committing to let inflation overshoot its target after a period of sluggish price growth, it has said for the first time.
Ecb president christine lagarde told a conference in frankfurt on wednesday that the usefulness of such an approach could be examined as part of the central banks strategy review.
The wider discussion today... is whether central banks should commit to explicitly make up for inflation misses when they have spent quite some time below their inflation goals, she said, speaking by video link.
If credible, such a strategy can strengthen the capacity of monetary policy to stabilise 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.
The ecb launched a review of its strategy in january but it was put on hold in march because of the coronavirus pandemic and is now only due to be completed in september 2021.
Us fed president jay powell last month announced a strategic shift in the central banks policy toan average inflation target, which would tolerate inflation overshooting its 2 per cent target for a period of time, to make up for a period of undershooting it.
Analysts believe this shift by the fed puts pressure on the ecb and other central banks to do the same or risk being perceived as having a less accommodative monetary stance.
The idea is likely to prove contentious among some ecb policymakers. speaking at the same event, jens weidmann, president of the bundesbank and ecb governing council member, warned about the risks of changing the strategy too drastically.
The more widely we interpret our mandate, the greater the risk that we will become entangled with politics and overburden ourselves with too many tasks, he said.
Ms lagarde said the strategy review would consider including whether to change from the current inflation target of below, but close to, 2 per cent to a more symmetric one that is as concerned about undershooting its target as overshooting it.
To underpin inflation expectations, we need to ensure that our aim is perceived to be symmetric by the public, she said.
In addition, she said the way inflation was measured could be changed to take greater account of owner-occupied housing prices and called for greater emphasis to be given to underlying inflation, which excludes more volatile elements such as energy and food prices.
The ecb has failed to achieve its target over many years and the eurozone has fallen into deflation since the coronavirus pandemic hit, although the central bank expects this to only be temporary.
Analysts said ms lagardes speech boosted the chances that the ecb would adopt a more accommodative strategy to keep rates lower for longer. her warning that the connection between investors inflation expectations and the central banks target had softened recently signalled that more easing was likely in the coming months, they said.
Frederik ducrozet, strategist at pictet wealth management, said: this is a bold statement from the ecb president, one that contrasts with her previous comments on the inflation outlook and that calls for additional stimulus sooner rather than later.
Ms lagarde also said structural changes to the eurozone economy including globalisation, digitisation and demographics have lowered the natural rate of interest, calling into question what should be the standardised toolkit for a world where unconventional policy is normal.
Andrew kenningham, economist at capital economics, said: todays speech suggests that ms lagarde will be an active participant on the dovish side of the strategy debate rather than primarily a chairman or umpire.