Rehn calls for a change in the ECB’s inflation target in line with the Fed’s approach

One of its top officials should follow the leadership of the U.S. Federal Reserve by accepting an overrun of its inflation target to offset many years of slow price growth.

Olli Rehn, who serves on the ECB’s interest rate-setting board as governor of Finland’s central bank, told the Financial Times that changes in the eurozone labor market and the world economy had weakened wage inflationary pressures and which meant that “the economy can cope with lower levels of unemployment. . . without rapid inflation ”.

“If so, from the point of view of economic and social welfare it makes sense to accept a certain period of [inflation] oversizing, given the history of undersizing, “Rehn said.” That’s why, in addition to price stability, the sense of total or maximum occupancy makes sense in the current context of lower natural interest rate “.

The ECB has not reached its inflation target close to 2% per cent for most of the last decade, despite lowering interest rates in negative territory and buying more than 4 billion euros in bonds. .

Rehn said the way the goal was worded had “generated a perception of asymmetry and some ambiguity.” The Bank of Finland estimates that the ECB’s de facto inflation target is 1.6 to 1.8%, with Rehn adding: “The worst thing is that 2% has been perceived as a ceiling and that lowers inflation expectations. “

The ECB is expected to change its inflation target this autumn, when it completes its first review of the strategy in 18 years. The EU treaty founded by the ECB established its main mandate as price stability, leaving it to decide how to define it. Initially, a target was set for inflation to be below 2%, but later changed to close to 2%, but below.

Last year, the Fed completed its strategy review and pledged to let inflation exceed its target to offset a period of low performance, in position being tested as the pace of price growth is expected to exceed its 2% target this year.

Other members of the ECB’s governing council have also spoken out in favor of following the Fed’s move. Philip Lane, Chief Economist of the ECB, he told the FT recently, “there is a very strong logic” to the Fed-style flexible average inflation segmentation.

Eurozone inflation rebounded in April, rising to 1.6 percent, after becoming negative in the last months of last year. The ECB has forecast that price growth will rise above 2% by the end of this year, before fading next year and staying below its 2023 target.

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

The central bank has said it will end the € 1.85 billion emergency bond purchase program it launched last year when it judges the pandemic crisis is over. Until then, it has pledged to use bond purchases to maintain “favorable financing conditions,” which analysts interpret as wanting to keep bond yields low.

This month, the ECB Council will hold a seminar on the interaction between monetary and fiscal policy as part of its strategy review. Rehn said he would likely include a discussion on how the two would interact as the economy emerged from the crisis.

He said the ECB should move to a different role after this critical period, which he compared to that of one Free, or sweeper, in football: a player who wanders behind the defensive line to collect lost balls and recycle them to attackers. Rehn played football for a Finnish first division team in his youth and is now vice-chairman of the FIFA governing committee.

“If we look at the combination of fiscal and monetary policies to get out of the crisis. . . monetary policy should play a role Free in the sense that it will ensure favorable funding conditions so that we continue to provide a bridge over troubled water, ”he said.

Rehn added that it was “very important” for governments to plan to reduce their debt levels, which have risen in response to the pandemic. “Europe still needs a very accommodative monetary policy. However, this position will not be maintained forever and, at some point, the financing costs of the [eurozone’s] sovereigns will increase, ”he said.

Rehn is a former Finnish economy minister and was the EU’s commissioner for economic and monetary affairs during the eurozone sovereign debt crisis in 2012, when he helped negotiate austerity measures imposed on Greece as apart from his rescue.