ECB’s De Cos Backs Fed-Style Strategy of Inflation Overshoot

(Bloomberg) -- European Central Bank policy maker Pablo Hernandez de Cos added his support to arguments for a Federal Reserve-style strategy that allows officials to temporarily overshoot their inflation goal.

Echoing comments a day earlier by President Christine Lagarde, the Bank of Spain governor said it’s worth examining a more “symmetrical” inflation target. The ECB should make it clear “that the degree of acceptance for inflation deviations above the target will be the same as when such deviations are below.”

His remarks are the latest signal that the ECB’s first strategic review in almost two decades will likely conclude with a recommendation to change the current inflation goal of “below, but close to, 2%.” Officials have increasingly voiced concern that such phrasing emboldens calls for tighter policy too soon, before price stability is entrenched.

“It might be necessary to clarify the specific level of inflation that we intend to achieve, to make it easier for economic agents to understand,” said Hernandez de Cos.

As part of its own strategic review, the Fed agreed earlier this year to start targeting an average inflation rate of 2%, giving the institution room to overshoot to make up for earlier underperformance.

The ECB’s assessment is due to finish in the second half of next year, and Lagarde said Wednesday that allowing room to overshoot its goal “raises inflation expectations” and so should be considered.

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