ECB’s Jens Weidmann Signals Openness to Tweaking Inflation Goal
(Bloomberg) -- The European Central Bank needs an “understandable, forward-looking and realistic” inflation goal -- but not necessarily a higher one, according to Bundesbank President Jens Weidmann.
The German staked out his position on the most important part of the ECB’s strategy review for the first time since President Christine Lagarde launched the assessment last month. She was in the audience at the nation’s stock exchange on Monday evening, as Weidmann signaled an openness to change following years of failing to hit the target of inflation “below, but close to, 2%.”
His input could be key to the outcome of the review, expected later this year. He was a frequent opponent of the radical stimulus put in place by Lagarde’s predecessor, Mario Draghi, and the new president has indicated that she’s keen to heal the divisions on the policy-setting Governing Council.
Suggestions so far have included tweaking the goal to a simple 2%, possibly with a band of tolerance around it. At least one policy maker, Austrian Governor Robert Holzmann, favors lowering the target to reflect downward price pressures that are beyond the central bank’s control, such as globalization.
Outside the ECB, some academics have suggested central banks should set their targets above 2% to give them more leeway. Proponents of that strategy include Olivier Blanchard, the International Monetary Fund’s chief economist when Lagarde was in charge of that institution. Weidmann shot down the argument.
“The gain in the capacity to act could be smaller than hoped,” he said in comments translated from German. “A strong increase in the goal could raise risks that inflation expectations become deanchored,” he said, adding that “higher inflation comes with costs for people.”
Call for Realism
Instead, Weidmann said the ECB would benefit from a target that’s easily understood by ordinary people, focused on the medium term -- “because monetary policy can only influence current price developments with difficulty” -- and realistic about what it can achieve.
In a sign that he might back a 2% goal, he said “we should counteract any impressions and claims that we can fine-tune inflation to the decimal place -- we can’t do that!” He also said the Bundesbank is planning to survey private citizens every month on their inflation views.
Weidmann opposed Draghi’s decision last September to renew quantitative easing as the economy faltered under trade tensions. Reiterating that skepticism on Monday, he argued that officials would benefit from more caution and a greater appreciation of risks such as asset-price bubbles from ultra-loose monetary policy.
“A realistic and forward-looking definition of our goal allows monetary policy to wait if there are good reasons, in order not to react hectically to every change in incoming data,” he said. It “allows the incorporation of the longer-term risks to price stability.”
The ECB will also study whether to change the way it measures inflation, to include the cost of owner-occupied housing. That idea appears to be gaining ground, with Executive Board member Yves Mersch endorsing it last month, and his colleague Philip Lane saying this week it’s a “real issue” that at least needs to be taken seriously.
Weidmann said it is “unarguable” that the topic needs to be addressed. Noting that reasons for the absence of such a major expense from the official index are largely technical, he said he’d be willing to make compromises on the methodology if that resulted in a more realistic assessment of the cost of living.
While an exit from the ECB’s current expansionary stance is still a long way off -- economists see quantitative easing running until at least the end of next year, with no rate hikes until the middle of 2022 -- Weidmann said the review should also investigate how banks can be weaned off unprecedented support.
“We also have to think about how the exit from loose monetary policy can be done,” he said. “The increased fusion of monetary and fiscal policy, growing risks for financial stability and a general getting-used-to cheap money turn monetary-policy normalization into an ever increasing challenge.”
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