Business

ECB should not tolerate inflation overshoot, Weidmann says

The European Central Bank should not start tolerating higher inflation under its new policy framework, as that could be taken as a sign that it is trying to bankroll indebted governments, ECB policymaker Jens Weidmann said on Thursday.

ECB policymakers are in the middle of debating a new strategy, with many now backing the notion of letting inflation surpass 2% for a while after it has lagged below that level for most of the past decade.

But Weidmann, who heads Germany’s Bundesbank and has long warned that the ECB’s massive purchases of government bonds risked blurring the lines between monetary and fiscal policy, rejected that approach.

“Holding still when the inflation rate exceeds (the ECB’s)target level in the medium term could be misunderstood…as an attempt by monetary policy to put the sustainability of public finances above the goal of price stability,” he said in a speech.

“This could make it even more difficult to anchor inflation expectations”.

He also reaffirmed his opposition to targeting an average inflation rate, as the U.S. Federal Reserve is doing, saying it would be difficult to communicate and painful to implement.

Instead, Weidmann said the ECB should set its inflation goal at 2% and see it symmetrically, meaning any overshoot would be taken just as seriously as an undershoot.