ECB's Knot, Rehn speak in favor of simple 2% inflation target

[January 24, 2020]    By Balazs Koranyi and Anne Kauranen

DAVOS, Switzerland/HELSINKI (Reuters) - The European Central Bank should adopt a simple inflation target of 2% and scrap its current "below, but close to, 2%" formulation which can confuse consumers and policymakers alike, two ECB rate-setters said on Friday.

 Finland's central bank governor Olli Rehn in Helsinki, Finland July 17, 2018. REUTERS/Ints Kalnins/File Photo

The ECB has lagged its goal for price growth for years despite an aggressive stimulus policy of sub-zero rates and massive bond purchases.

It has now embarked on a year-long review that will see it redefine that aim, how to achieve it and communicate it.

Speaking the day after the official launch of the review, Dutch governor Klaas Knot and his Finnish counterpart Olli Rehn both signaled their preference for a 2% target.

"It is not an easily communicable concept that we currently have a 'close' and a 'below'," Knot said during a panel discussion at the World Economic Forum.

"The outcome should be that we have an inflation objective that everyone on the Governing Council explains in identical terms."

Knot, one of the most outspoken policy hawks at the ECB, has proposed adopting a 2% target with a tolerance band around it - a move that would lower the pressure on the ECB to ease policy further.

In Helsinki, Olli Rehn said the current formulation was skewed in favor of lower inflation rates while the ECB's target should be symmetric, meaning any undershoot should be taken just as seriously as an overshoot.

"This double-barrelled definition deviates downwards, meaning it is tighter, from the other central banks' goals, which are usually symmetric and at around 2%," Rehn said.

Euro zone price growth rebounded at the end of 2019, with headline inflation ticking up to 1.3% in December from a three-year low of 0.7% two months earlier.

But both Knot and ECB President Christine Lagarde dismissed the recent increase in core and headline inflation as too small to matter.

"We're seeing inflation moving a teeny, tiny little bit but this is really minor," Lagarde said at the World Economic Forum. "It would take much higher numbers to actually change the picture fundamentally."

She warned, however, that financial markets should not simply assume that the ECB's policy was on hold until the end of the review.

"To think it's autopilot, that's ridiculous," Lagarde said on Bloomberg TV. "Let's look at how the economy evolves."

(Writing by Francesco Canepa in Frankfurt; Editing by Kevin Liffey and Hugh Lawson)

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