By Bart H. Meijer
THE HAGUE (Reuters) – The European Central Bank should ditch its central inflation target and accept a less stringent one, as the current policy cornerstone has distorted markets and risks normalizing interventions, its former chief economist said on Monday.
Juergen Stark said the ECB’s ultra-loose policy had pumped up prices of bonds, stocks and property to levels unhinged from economic reality, at a time when low rates of inflation did not pose an economic threat.
“The ECB has to accept that inflation can be lower in the future than we were used to”, Stark — who quit the ECB in 2011 in a row over policy — told Reuters in an interview. “Then they won’t have to keep distorting markets.”
In an attempt to pull inflation back to its mid-term target of just under 2 percent following the global financial crisis, the ECB has — in common with other major central banks — adopted unprecedented stimulus including cutting interest rates below zero and buying trillions of euros worth of bonds.
“Low inflation has in fact helped economic growth in the euro area to its present levels”, the German economist said on the sidelines of an event organized by Aegon Asset Management in The Hague. “It has raised the disposable income of households and has worked like a tax reduction.”
The ECB is reducing its bond-buying stimulus after extending it into next year, but has not ruled out a further prolongation beyond September, when the program is now scheduled to end, if economic conditions so dictate.
Globalisation and technological innovations could put a lasting brake on inflation, in which case a narrow inflation goal would just lead to more and more interventions, Stark added.
“A central bank is incapable of fine-tuning the inflation rate as the ECB is trying to do”, he said. “Accept lower inflation, so that you don’t harm the market economy.”
Euro zone inflation has been below the ECB’s target since early 2013, and staff projections indicate it will not rise back towards 2 percent before 2020 at the earliest.