By Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) – There is reluctance among European Central Bank policymakers to follow the U.S. Federal Reserve’s move to target an average inflation rate, fearing this could tie their hands, sources involved in a revamp of ECB policy told Reuters.
The four central bank sources, including members of both the hawkish and dovish wings of the ECB’s policymaking governing council, also expressed doubts about whether orthodox inflation theory still applied in economies where prices have long stagnated despite interest rates close to or below zero.
After missing its goal of keeping inflation “below but close to 2%” for a decade, the ECB is reviewing its strategy in the wake of a similar review by the Fed and just as a pandemic-induced recession is pushing euro zone inflation into negative territory.
The euro zone’s central bank has been expected to follow the Fed, which said in August it would aim for 2% average inflation over an unspecified period, so that periods when prices grow too slowly need to be compensated by times of faster increases – and vice versa.
But the policymakers who spoke to Reuters feared that going down this route risked encouraging financial markets to jump to the wrong conclusions about future policy decisions based simply on where the average happened to be at a given point in time.
Instead, they wanted to retain the flexibility to judge each situation on its own merits, for instance by playing down the significance of temporary changes in inflation due to swings in the price of oil.
“We want flexibility so an average target would not really give us a benefit,” one of the sources said.
An ECB spokesman declined to comment.
With euro zone inflation averaging 1.3% over the past decade and currently negative, they