Europe’s top central banker Wednesday suggested that symmetrical inflation targeting could have merit in dispelling the low inflation environment suffered in advanced economies since the financial crisis.
Addressing the ECB and its Watchers XXI conference in Frankfurt, ECB President Christine Lagarde noted that many central banks have explored a strategy to overshoot inflation to “explicitly make up for inflation misses”.
Federal Reserve Chairman Jerome Powell announced such a measure in August, shifting the Fed toward “flexible average inflation targeting”, in which the US central bank may tolerate a period of above-target inflation to compensate for periods of low inflation.
Lagarde stopped short of committing the ECB to a similar plan, but noted that, “such a strategy can strengthen the capacity of monetary policy to stabilise the economy when faced with the lower bound [of interest rates]. This is because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates,” she added.
The ECB has resumed its strategy review after a pause during the height of the economic crisis wrought by the Covid pandemic. But Lagarde refused to prejudge the results of the review. “Now is the time for listening and reflecting,” she said.
Inflation in the eurozone fell by an annual rate of 0.2% in August, and many economists have criticised the ECB’s seemingly relaxed approach to long-term, below-target inflation. September data are due for release on Friday.