February 26, 2020 / 11:30 AM / a month ago

ECB may need clearer inflation target: Makhlouf

BERLIN (Reuters) - The European Central Bank may need a clearer, simpler inflation target, Irish central bank chief Gabriel Makhlouf said on Wednesday, making the case for improved communication with the public.

The ECB, which is currently reviewing its target as part of a broader analysis of its entire policy framework, aims for inflation at “below but close to 2%”, a wording that some have called confusing and ambiguous.

The current formulation could suggest that the ECB cares more about too high inflation than too low, and may create a false perception that the bank can fine-tune inflation to a tenth of a percent, critics say.

“We central banks need to do a better job at communicating and explaining,” Makhlouf, who sits on the ECB’s rate-setting Governing Council, said in Berlin. “It seems that there continues to be uncertainty about exactly what ‘close to, but below’ means.”

Public comments suggest policymakers are willing to set the target at simply 2%, and the biggest discussion in the review seems to be about how much deviation from this target the ECB could tolerate and how to define the boundaries of this tolerance.

“It has been argued that since central banks are unlikely to hit a point target on a regular basis, having one makes it harder to explain policy to the public and that a range, with or without a focal point, may be more realistic and therefore provide the central bank with more credibility,” Makhlouf said.

Another problem is that while the ECB is fighting ultra low inflation, the general public perception is that prices are actually rising rapidly.

Part of the problem is due to the low share of housing costs in the inflation basket, meaning that much of the recent rise in house prices may not be reflected in official inflation data.

“The question we have to consider is whether the current consumer price index is helping to communicate the central bank’s objectives in the most effective way, even though it may be a perfectly reasonable tool for policymakers and informed observers,” Makhlouf said.

Reporting by Michelle Martin and Madeline Chambers; Writing by Balazs Koranyi; Editing by Andrew Heavens and Hugh Lawson

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