ECB Could Simplify Its Inflation Goal, Villeroy Says

(Bloomberg) --

The European Central Bank could simplify its inflation goal and even allow prices to run hot temporarily, Bank of France Governor Francois Villeroy de Galhau said.

The ECB is in the process of conducting a strategy review, which could include an adjustment to its current inflation goal of “below, but close to, 2%.” Results are expected in the latter half of this year.

“Our inflation objective must be understood as simple, symmetric and medium-term oriented,” Villeroy said at an event hosted by the Peterson Institute for International Economics.

“‘Simple’ means that we could reexamine over-sophisticated qualifiers still associated with the 2% figure,” he said. “‘Symmetric’ refers to the fact that our objective is a target and not a ceiling: we might be ready to accept inflation higher than 2% for some time.”

The French central banker also said that worrying about a resurgence of inflation in the euro area is premature as factors driving prices higher are temporary and substantial economic slack will continue to weigh in the medium term. It’s therefore not yet time for the ECB to exit its crisis program known as PEPP.

Even a possible end to net PEPP purchases by March 2022 “would not imply an abrupt tightening of our monetary policy,” Villeroy also said. “Reinvestments under PEPP would remain significant, net purchases would continue under the APP, possibly somewhat adapted.”

Such an exit from exceptional measures, combined with the current flexibility of the PEPP program and more explicit guidance on letting inflation overshoot would provide a trio of elements to guide ECB policy out of the crisis, he said.

“It is the combination of these three levers that should be used as the foundations of the “equilibrium triangle” of our monetary policy in this next phase,” Villeroy said

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