Wed, 21 Oct 2020

FRANKFURT, Sept. 30 (Xinhua) -- European Central Bank (ECB) President Christine Lagarde said on Wednesday that her institution could examine the "usefulness" of a policy approach where inflation is allowed to temporarily overshoot its target.

Addressing a conference via video link, Lagarde said there is a "wider discussion" today on "whether central banks should commit to explicitly make up for inflation misses when they have spent quite some time below their inflation goals."

"If credible, such a strategy can strengthen the capacity of monetary policy to stabilize the economy when faced with the lower bound," she said, adding that "this is because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates."

However, she also noted: "While make-up strategies may be less successful when people are not perfectly rational in their decisions -- which is probably a good approximation of the reality we face -- the usefulness of such an approach could be examined."

The ECB has been aiming for inflation of "below, but close to, two percent" for years but has failed to achieve this target. Recent data from the eurozone statistical authority showed the eurozone annual inflation even fell to minus 0.2 percent in August.

Analysts have wondered about the ECB's reaction after the U.S. Federal Reserve announced a new policy shift in late August, pledging to achieve inflation that averages two percent over time. But the ECB did not make any policy change at its early September meeting.

Lagarde said on Wednesday that issues related to the inflation objective will be featured in the central bank's long-awaited strategy review, which the ECB has recently restarted after suspending it during the first few months of the COVID-19 outbreak. The review is expected to be completed in the second half of 2021.

Questions like how to formulate the inflation aim, the horizon over which price stability should be achieved, and the measure of inflation will be examined, Lagarde said. She also spoke of the structural forces behind the relationship of prices and the real economy and the challenge facing monetary policy transmission and effectiveness.

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