FRANKFURT (Reuters) – The European Central Bank should simplify its inflation target as part of a broad review of policy but avoid any “sharp” increase in its objective, Bundesbank President Jens Weidmann said on Monday.
The ECB launched a one-year review of its strategy last month and will likely tweak its inflation target at the end while also looking at the effectiveness of its various policy tools, many of which were invented in the aftermath of the euro zone’s debt crisis.
Weidmann said the target should be formulated so it is easily understood, avoids a sharp increase compared with the current definition, and dispels the illusion that the ECB could fine-tune inflation to a tenth of a percent.
These arguments appear to mirror calls from some policymakers to set the target simply at 2%, giving up the current objective of “below but close to 2%,” a definition that could be interpreted in different ways and is seen by some as confusing.
“I believe that we should formulate our monetary policy objective in a way that is understandable, forward-looking and realistic,” Weidmann told an audience, which also included ECB boss Christine Lagarde.
Weidmann added that the ECB should continue to aim to control inflation over the medium term to retain flexibility.
The ECB has undershot its inflation target every year since 2013, even as it resorted to an unprecedented cocktail of stimulus measures to boost growth, consumption and ultimately prices.
Weidmann repeated his longstanding criticism of asset purchases, arguing that the ECB should follow a clear order when using policy instruments, reserving bond purchases as an emergency tool.
The ECB currently buys 20 billion euros worth of bonds a month, mostly government debt, to keep borrowing costs low and lift growth.
“I am particularly critical of the large purchases of government bonds in the euro area,” Weidmann said. “I think they should be an emergency tool because they run the risk of blurring the dividing line between monetary and fiscal policy.”
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Source: Economy - investing.com
