Christine Lagarde has laid the groundwork for a strategy shake-up at the European Central Bank that would follow the lead of the US Federal Reserve in overhauling its inflation target.
The ECB president signalled that it could adopt a policy that allows price rises to overshoot its target as she battles to revive the region’s dimming inflation.
Ms Lagarde strongly indicated the ECB’s ratesetters were ready to scrap its “below but close to 2pc” inflation aim, a target it has consistently missed in recent years.
An average inflation target would allow the ECB to leave policy at ultra-loose levels even if price rises overshoot. Under the current policy, inflation has struggled to reach its target since the financial crisis, raising fears of damaging deflation taking hold in the region.
Ms Lagarde said at an online conference that its current policy target was appropriate for a high-inflation environment and stressed the “concerns we face are different and this needs to be reflected in our inflation aim”.
She said an average inflation target could “strengthen the capacity of monetary policy to stabilise the economy” when it reaches its limits. She added that the “promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates”.
The ECB’s ratesetters are undergoing a strategy review after their policies were pushed to their limits in the pandemic. Despite cutting rates deeper into negative territory and ramping up its bond buying programme, the eurozone sank into deflation territory in August.
Andrew Kenningham, economist at Capital Economics, said the speech made Ms Lagarde “an active participant on the dovish side of the strategy debate”.
“Lagarde made it clear that she would prefer a genuinely symmetric target,” he said. “Her comment that the target needs to be ‘perceived to be symmetric by the public’ is code for the ECB dropping at least the ‘below’ element of the ‘below, but close to’ formula.”
The Fed switched to an average inflation target in August but the ECB's strategy review is not expected to be completed until next year.