ECB Should Weigh Taking Longer To Hit Inflation Target: Schnabel

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FRANKFURT: The European Central Bank should consider taking longer to raise inflation to target as ultra-easy policy is constrained, faces unintended side-effects and as the bank struggles to maintain public trust, ECB board member Isabel Schnabel said on Tuesday.

ECB policymakers are debating how to redefine their inflation target as part of a broad strategy review. Price growth has undershot the bank’s target for nearly eight years and will continue to do so for years to come, despite unprecedented stimulus.

“By accepting a somewhat slower return of inflation towards their aim, and by focusing more on the duration of policy support, central banks may effectively mitigate potential risks to financial stability arising from a more intense usage of their policy instruments in the pursuit of their mandate,” Schnabel said in a speech.

The ECB targets inflation at just below 2% over the medium term, an undefined concept that has changed over time and is now understood to mean longer than the ECB’s two-year forecast horizon.

“A more elastic use of the ‘medium term’ notion might be all the more conducive in an environment in which (there is) a high degree of prevailing uncertainty,” Schnabel added.

The ECB has bought trillions of euros worth of debt over the past five years, cut rates deep into negative territory and subsidized banks by paying them to borrow, all in the hope of spurring growth.

But such policies have also eroded public support for the institution, Schnabel warned.

“Trust in the ECB remains unacceptably low and has fallen over time, also as unconventional instruments have introduced concepts and terminology that are hardly accessible to a large part of our society,” she said.

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