Business World

Saturday 21 July 2018

ECB 'wrong on threat from inflation'

European Central Bank headquarters in Frankfurt, Germany
European Central Bank headquarters in Frankfurt, Germany

Jonathan Cable

The European Central Bank (ECB) should ditch its central inflation target and accept a less stringent one, as the current policy cornerstone has distorted markets and risks normalising interventions, its former chief economist has said.

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.

It came as data showed the eurozone economy is on track for a strong finish to 2017 and firms are passing on more of their costs to consumers as pricing power increased.

IHS Markit's final composite Purchasing Managers' Index for the eurozone fell to 56.0 in October last month from September's 56.7, comfortably above the 50 mark that denotes growth.

"The final euro area PMI was revised up marginally from the flash to leave euro area growth looking healthy at the beginning of Q4," said Cathal Kennedy at RBC Capital Markets.

Mr Stark said policy makers needed to reconcile themselves to low inflation.

"The ECB has to accept that inflation can be lower in the future than we were used to.

"Then they won't have to keep distorting markets", said Mr Stark - who quit the ECB in 2011 in a row over policy.

"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 organised by Aegon Asset Management in The Hague.

Low inflation raised disposable incomes, he said. (Reuters)

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business