Rehn called for a shift to the ECB’s inflation target in line with Fed’s view

The European Central Bank should follow the line of the US Federal Reserve by allowing it to exceed its inflation target in order to complete a slow rise in prices for many years, said one of its top officials.

Olli Rehn, who serves as governor of the ECB’s interest rate bank on the ECB’s interest rate fixing board, told the Financial Times that inflationary pressures on the eurozone labor market and the world economy had weakened and “the economy could face lower unemployment levels… without “.

“If this is the case, it is reasonable to accept a certain period from the point of view of economic and social welfare [inflation] an excessive shot, given the history of the minimum shot, “Rehn said.” Therefore, in addition to price stability, paying attention to full or maximum employment makes sense in the context of a lower current interest rate. “

The ECB has not met the target of inflation for most of the last decade but below the 2% inflation target, even though interest rates have cut sharply in negative territories and bought more than 4 billion euros in bonds.

Rehn said the goal was to create a “perception of asymmetry and some kind of ambiguity” in the way he spoke. The Bank of Finland has estimated that the ECB’s de facto inflation target is between 1.6 and 1.8 percent, adding that “the worst is that it is perceived as a 2 per cent ceiling, which slows inflation expectations.”

The ECB is expected to change its inflation target in the autumn, when the first review of its 18-year strategy is completed. The EU treaty that established the ECB established its first mandate as price stability, and decided how to define that. Initially inflation set a target of less than 2 percent, but later changed that to close to 2 percent, but below.

Last year, the Fed completed its own review strategy and promised that inflation would allow it to exceed its target to form an insufficient period, a the attitude being tested because the pace of price growth will rise above the 2% target this year.

Other members of the ECB’s governing council have also spoken out in favor of following Fed’s move. Philip Lane, Chief Economist of the ECB, he told FT recently, that there is “very strong logic” regarding the Fed’s average viable inflation rate.

Eurozone inflation rose in April, it rises to 1.6 percent, after becoming negative in the last few months of last year. The ECB predicts that price growth will rise by more than 2% this year, before shutting down next year and keeping it below its 2023 target.

If the ECB were to pass an inflation period that exceeds its target, it would give the central bank more flexibility to continue buying bonds as the eurozone economy recovers from the fall of the coronavirus pandemic.

The central bank has said it will end the program to buy emergency bonds worth 1.85 million euros launched last year when it judges the end of the pandemic crisis. Until then, the bond was committed to maintaining “good financing conditions,” as analysts understand that the bond’s profitability is aimed at being low.

This month, the ECB Council will hold a seminar on the interaction between currency and fiscal policy as part of the strategy review. Rehn said it is likely that they will discuss how the two would affect their exit from the economic crisis.

He said the ECB should move to a different role after this critical period, and he compared that free, or sweep, in football – a player who walks behind the defensive line to lose balls and recycle to attackers. Rehn played football for a Finnish first division team in his youth and is now vice-chairman of FIFA’s governing board.

“If you look at the mix of tax and monetary policy as you emerge from the economic crisis… Monetary policy should play a role. free in the sense that it will ensure good funding conditions so that we can continue to build a bridge over turbulent waters, ”he said.

Rehn added that it is “very important” that governments intend to reduce debt levels as they respond to the pandemic. “Europe still needs a lot of money. This attitude, however, will not be maintained forever and will cost funding at some point [eurozone’s] sovereigns will increase, ”he said.

Rehn is a former Finnish economy minister who was the EU’s commissioner for economic and monetary affairs in the eurozone sovereign debt crisis in 2012, when he helped Greece negotiate austerity measures imposed within the bailout.