December 18, 2019 / 12:13 PM / a month ago

UPDATE 1-ECB should refine inflation target, aim for more flexibility - Coeure

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FRANKFURT, Dec 18 (Reuters) - The European Central Bank should come up with a more easily understood inflation target and try to be more flexible in achieving its objective, outgoing board member Benoit Coeure said at a farewell event on Wednesday.

The ECB, which targets inflation at below but close to 2%, plans a broad review of its policy next year, and the definition of price stability is likely to be the centre point of the discussion.

The current definition assumes a target of 1.9%. Coeure said this could raise expectations for the ECB to control inflation up to the first decimal point and create an “absurd idea” of an omnipotent central bank.

“The ECB should clarify that it aims to deliver inflation of 2% over the medium term,” Coeure said. “And it could communicate the range of inflation outcomes that can be considered acceptable in normal times.”

The ECB has undershot its target since 2013, and its projections suggest that price growth will remain weak for years to come.

Coeure dismissed the idea that a band around the target would weaken the central bank’s resolve to work towards the target and would thus mean a de facto cut in the objective.

“Research shows that central banks have a strong incentive to already respond to inflation deviations within the tolerance zone, rather than waiting until inflation has crossed the edges,” he argued.

But Coeure also noted that there are structural factors holding down inflation, including effects of ageing, the rise of services and the broader effects of globalisation, so price growth is unlikely to accelerate “in the near future.”

Arguing that the ECB’s past stimulus has been effective, Coeure argued that a way forward could be to broaden the list of parties the ECB interacts with.

While now banks tend to transmit the ECB’s policy, the bank could allow others, including the general public, to access its balance sheet via a digital central bank currency.

“There are few reasons why central banks, within their mandate, should not apply the same set of instruments to accounts of private individuals that they currently apply to banks – that is, charge interest rates on central bank digital money,” he added. (Reporting by Balazs Koranyi; Editing by Alison Williams and Hugh Lawson)

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