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MNI (London)
--Inflation Target Leeway Possible Only in Adjustment Timing
--ECB Open To Flexibility In Infla Adjustment Path, Not In Set Target
     LONDON (MNI) - The European Central Bank's Governing Council has not
debated possible flexibility in the current inflation target and any leeway
would just be in the timing of the adjustment path necessary to reach the goal,
a senior official at a Eurosystem central bank told MNI in exclusive comments.
     "The Governing Council has never placed the set inflation target under
discussion, nor the possibility of recalibrating it. We are sticking to our
commitment of securing a sustained return of inflation rates towards levels that
are below, but close to, 2%," the source said.
     "The idea of downgrading the target to a lower level in a moment in which
we are not fulfilling it, just for the sake of getting it closer to where we now
stand, has no sense and would be counterproductive," the source added.
     On Thursday, the ECB's Governing Council left its asset purchase program
(APP) and key interest rates unchanged, expecting these to remain at their
present levels for an extended period of time, and well past the horizon of the
net asset purchases. No adjustments were made to its forward guidance
     The source argued that a certain degree of leeway in the timing of the
inflation adjustment path is an integral part of monetary policy strategy
     "There has always been flexibility in timing: the goal is to achieve the
inflation target in a medium-term period, whether such time-frame is of 2.5
years or 3 years is not an issue. The Governing Council has never been obsessed
with such a temporal perspective, the importance is to get there (price
stability), not whether this will take 5 or 6 months more or less than
previously expected," the source argued.
     Flexibility in timing is one thing, stressed the source, and can be
discussed within the ECB in consideration of evolving economic conditions, but
flexibility in the inflation corridor target is not an option on the table.
     "If our inflation target is below but close to 2%, and we have not yet
reached a satisfying level in price stability, how could we ever lower the
target just for the sake of feeling fully satisfied with our job? It does not
and cannot work that way," added the Eurosystem source.
     The source expressed confidence that the ECB's inflation objective will be
met though "it is not yet clear when exactly" in the short run.
     The source argued that the ECB's mission had never been driven by an
"inflation-targeting (IT) approach" similar to the Bank of England's one whereby
inflation targets are frequently shifted in accordance with the policy goal set
by the UK's Treasury: "This has simply never been the direction we follow".
     A discussion is though underway on the Governing Council on when to
terminate the APP.
     "The end of the quantitative easing (QE) has always been 'a conditioned
exit', depending upon the eurozone's outlook and reached inflation targets. It
could happen in September, or past that date. Nobody in the Governing Council
has ever wanted to set, nor aims to set, a specific date for such an exit," said
the source.
     "If the conditions in September are favourable, a few members (of the
Council) are already willing to end the QE then, but whether this will indeed
happen or instead, the program be extended beyond September, is something we
will decide together only once we get there," the source continued.
     The source however warned against an "abrupt" end to monetary policy ahead
of time, before the effects of its measures fully consolidate.
     "We can't just assume that once we reach our goal, it's the end of the
road. The QE exit must be soft, not hard. We need to make sure that the effects
of monetary policy are fully absorbed by the eurozone's economy".
     The eurozone's average inflation rate remains very low, the source noted,
and while it remains below accepted levels, accommodative monetary conditions
are needed.
     The source stressed that to date, the current monetary policy is "bearing
fruit" and is therefore "necessary". "The normalisation process must be gradual
and prudent. Patience is key".
--MNI London Bureau; tel: +44 203-586-2225; email:
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MNI London Bureau | +44 203-865-3812 |