By Laurie Laird
— Central banks must be willing to countenance above-target inflation, says Philip Lane
LONDON (MaceNews) – Corporate bond purchases have made an important contribution to the European Central Bank’s stimulus programme, according to the ECB’s chief economist, who also hinted at a possible reinterpretation of the Bank’s efforts to meet its inflation target.
“The evidence is coming in more and more than the corporate sector purchase programme plays a very important role,” Lane told the Swedish network Dagens Industry TV on Thursday. “The fact is, it has a lot of spill-over effects on the wider credit market … . It creates the space for banks to have a greater willingness and capacity to lend to small firms and to individuals.”
Most discussion of the ECB’s quantitative easing programme has centred on sovereign bond purchases, particularly after a steep rise in U.S. yields spilled over into the eurozone earlier this year. The ECB reaffirmed its commitment to step up the pace of all purchases after its regular rate-setting meeting last week.
The eurozone economy likely contracted in the first quarter, Lane said, with the latest wave of Covid-19 requiring economic shutdowns in many large eurozone economies, although “the economy will be growing in May and June and even more strongly in the third quarter,” he added. First quarter eurozone output data are due on Friday.
Despite the expected recovery, the ECB expects inflation to hit just 1.5% in 2021, well below the Bank’s target of below but close to an annual rate of 2%. The ECB has been unable to hit that target for any sustained period over the past decade.
While other members of the Bank’s Governing Council have recently spoken of the symmetry of the inflation target, Lane dropped the strongest hint yet that the ongoing strategy review could give way to a new way of interpreting the target. “One way to make sure that people understand that the centre of the distribution needs to be anchored by the inflation target is that central banks are willing to see inflation not only be below target but above the target.”
But Lane stopped short of suggesting that the ECB might adopt the same strategy as the Federal Reserve, which last year announced its intention to tolerate above-target inflation to counter past undershooting. The Fed’s experiment with “average inflation targeting” is “not necessarily the only way.” The strategy review provides an opportunity to “explore in the European context .. what the best way to think about our inflation target should be.”
ECB officials have promised to complete the review in the second half of this year.
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Contact this reporter: laurie@macenews.com.
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