ECB should weigh copying Fed's new inflation target: Rehn

·2 min read
FILE PHOTO: Governor of the Bank of Finland, Olli Rehn speaks at a Reuters Newsmaker event in London

HELSINKI/FRANKFURT (Reuters) - The European Central Bank should consider copying the U.S. Federal Reserve's new inflation target and aim to make up for lost price growth after undershooting its aim, Finnish policymaker Olli Rehn said on Tuesday.

The Fed moved to average inflation targeting in August, promising to overshoot its target for "some time" to offset periods when it missed its 2% objective, an aggressive move intended to bring the United States back to full employment and lifting price growth.

Rehn praised this strategy and argued that the ECB needed to make its own "below but close to 2%" target genuinely symmetric and clarify that it would be sufficiently forceful if price growth deviates from its target in either directions.

"We ... should be open not only to a genuinely symmetric price stability target, but also to considering make-up strategies as a way to strengthen the commitment to symmetry," Rehn said in a speech. "Make-up strategies turn out to be effective in reaching inflation targets in the medium term."

The ECB has undershot its target for almost eight years. It is likely to miss for years to come while the economy tries to recover from a pandemic-induced recession.

Rehn's comments come as the ECB is debating a new definition of its inflation target as part of a broad strategy review, responding to the new economic reality of persistently low interest rates amid weak growth and low productivity gains.

But some policymakers have expressed doubts about making up strategies because they involve lengthy commitments about future policy and reduce their flexibility

Rehn also dismissed calls for the ECB to stick to a narrow definition of its mandate and continue to target inflation, leaving other policy areas to elected officials.

"It is already in the Treaty," Rehn said. "We need to aim at achieving full employment, balanced growth and sustainable development – indeed as long as price stability is not compromised," he said, referring to a vague clause in the EU Treaty that requires the ECB to support the general economic policies of the bloc.

(Reporting by Anne Kauranen and Balazs Koranyi; editing by Larry King)