Villeroy Says ECB Should Consider Tweaking Its Inflation Goal

(Bloomberg) -- European Central Bank policy maker Francois Villeroy Galhau signaled that he’s open to letting inflation rise above the institution’s goal and changing the language it has used for nearly two decades to set its objective.

The Bank of France governor said that the current target for price growth of “below, but close to, 2%,” is often incorrectly interpreted as a ceiling that would mechanically trigger tighter policy. Instead, it should be seen as “symmetric,” he said at an online conference on Friday.

“As a consequence we might be ready to accept inflation higher than 2% for some time,” Villeroy said. “We should examine whether the current formulation casts doubt on this.”

The comments are the latest salvo in the ECB’s strategic review, the first since 2003. The Frankfurt-based institution is arguably on the back foot after the U.S. Federal Reserve concluded its own assessment with a pledge to target an average inflation rate of 2%, meaning it’ll probably keep policy looser for longer.

That shift could make the ECB’s job harder by putting downward pressure on the dollar. A relatively stronger euro depresses inflation by cutting import costs and making exporters less competitive.

Euro-area inflation is now below zero for the first time in four years because of the coronavirus crisis. The Frankfurt-based central bank has spent most of the past decade failing to hit its goal, despite injecting massive liquidity and cutting interest rates below zero.

Each time price growth has moved much above 1.5%, more-hawkish governors have started a debate on whether to unwind the stimulus.

Villeroy said the ECB should judge inflation over the medium term and “cannot ignore the past” when assessing whether it’s meeting its price-stability mandate.

“All this is not explicit average inflation targeting ex ante, but would achieve very similar outcomes ex post,” he said. “We will have to discuss that.”

The Bank of France head also hinted at the possibility of more monetary stimulus ahead. Most economists expect the pandemic bond-buying program to be expanded this year.

“If needed, the ECB has ample room for maneuver,” he said. “Have no doubt about our determination to act as much as needed, and about our capacity to act.”

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