FRANKFURT (Reuters) – The European Central Bank (ECB) should continue to focus on returning inflation to 2% in the medium term because this allows for small temporary deviations, François Villeroy de Galhau, the governor of the ECB, said on Wednesday. the Bank of France (BdF).
With inflation now almost back to its target level, ECB policymakers are discussing how much room for maneuver they should have around 2% and will begin a review next year that could focus on this subject, among others.
“As part of a medium-term orientation, a central bank should not react to occasional short-term deviations, but rather to inflation dynamics which risk moving it away from its objective,” the governor said. during a speech at the London School of Economics.
“If inflation is above target, but converging at a sufficient pace, there may be no need to act,” he added. “Keeping inflation precisely at the 2% target permanently is neither realistic nor necessary.”
What matters, according to the monetary leader, is not the level of the deviation from 2% at a given moment, but the trend and persistence of the likely fluctuation.
Inflation fell to 1.7% last month and could be either side of 2% in the coming months, with many policymakers estimating it could reach its target by mid-2025 .
However, they are concerned about the possibility that inflation will remain below 2% in the longer term, given that growth is weak and the ECB keeps interest rates high.
For the ECB’s tolerance to work, it must communicate clearly what the medium term means and how it will return to the target, argued François Villeroy de Galhau.
“A medium-term objective that is too vague without a clear roadmap is a vague signal that would ultimately damage credibility,” he said. “The counterpart of such flexibility is that it involves clear communication on the horizon and the path to return to the objective.”
Various supply shocks, he added, could make inflation volatile and in such cases the underlying figures provided better clues about real price pressures.
Nonetheless, headline inflation is the bank’s target and consumers understand it better, so the ECB should not abandon its reference to the headline figure, he said.
(Reporting Balazs Koranyi; Kate Entringer, editing by Zhifan Liu)
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