Top official signals ECB would allow inflation to overshoot3 min read . Updated: 12 Oct 2020, 10:35 AM IST
- ECB Chief Economist Philip Lane says after eurozone’s rebound following spring contraction, ‘the next phase is going to be tougher’
A top European Central Bank official said the bank would be just as aggressive as the Federal Reserve in stimulating the region’s economy as it recovers from the Covid-19 pandemic, implying the ECB would also allow inflation to overshoot its target.
Philip Lane, the ECB’s chief economist, said in an interview with The Wall Street Journal that the eurozone economy faces a rocky patch after an initial rebound from its sharp spring contraction, with inflation still far too weak.
“The next phase is going to be tougher," Mr. Lane said. “The current inflation level remains far away from our goal" of just below 2%. Eurozone inflation fell to minus 0.3% in September.
Even as the eurozone economy has slowed, raising concerns about a possible double-dip recession, the euro has held onto its recent gains against the dollar and other currencies. That partly reflects investor concerns that the ECB has less room to cut interest rates—which would tend to weaken the euro—than other central banks like the Fed.
That is especially true since Fed officials said in August they would aim to keep inflation at 2% on average, meaning they would seek to push inflation moderately above that level for periods after intervals, like the current one, when inflation runs below it and short-term rates are pinned near zero.
The ECB, in contrast, aims to keep inflation just below 2%, and has fallen short of that target for most of the past decade. It is currently reviewing its strategy but the results aren’t expected until next year.
Mr. Lane argued the ECB already pursues an inflation strategy similar to the Fed’s new approach.
“I do not see that the ECB has a structurally tighter orientation for monetary policy" than the Federal Reserve, he said.
“Anyone who pays attention to our policies and forward guidance knows that we will not tighten policy without inflation solidly appearing in the data."
His comments suggest there may be less internal disagreement over the need for fresh ECB stimulus than investors suppose.
Jens Weidmann, the president of Germany’s conservative Bundesbank, has recently signaled he is skeptical about allowing inflation to overshoot the ECB’s target after it has been low for too long. But Mr. Lane said such a strategy was already implied by the ECB’s guidance, which stresses a “commitment to symmetry."
The eurozone’s economic recovery has slowed in recent weeks amid a second round of Covid-19 infections, which have triggered fresh restrictions on social and business activities.
Mr. Lane said the ECB would carefully monitor economic data this fall to decide whether to scale up its monetary stimulus, which comprises negative interest rates and some $3 trillion of fresh bond purchases and cheap loans for banks unveiled this year.
“The big question, and this is why there is so much uncertainty, is: How quickly can the current dynamic, with rising cases, be stabilized," he said.
“Meeting by meeting we will have to make that call: Where do we think inflation is going? Because if the outlook remains at 1.3% [in 2022], that is far away from our goal."
Many analysts expect the ECB to unveil a fresh round of bond purchases at its Dec. 10 policy meeting. Mr. Lane signaled that a decision could be made over the coming weeks as new information arrives, including on oil prices, the euro exchange rate and European governments’ budget plans for next year.
While a move to scale up the ECB’s bond purchases would have more impact in the current circumstances, an interest-rate cut also remains on the table, he said.
Mr. Lane also warned European governments that the ECB’s largess wouldn’t last forever, and urged officials to prepare to reduce their debts once the crisis subsided. He said the central bank would eventually reduce its bondholdings if conditions allowed it.
“You have to create some room in the good years, when the European economy has recovered," he said of government debt. “So we will want to see debt ratios come down to some extent. That message has to be there."
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