Two weeks before the European Central Bank’s next meeting may continue discussions on its inflation goal, Executive Board member Isabel Schnabel is urging greater patience in bringing price growth back on track.
The region has been hit by a number of crises in recent years that require the institution to exercise greater caution in assessing how inflation is affected over time, she argued at an event in London. Schnabel said the medium-term horizon the ECB uses in pursuit of its aim is “considerably longer than in the past,” with uncertainty impacted most recently by the spread of the coronavirus.
“Economies are constantly hit by a wide variety of shocks, and central banks often have only a limited understanding of the precise configuration of the forces pushing inflation in either direction,” she said, adding that very little is yet known about the potential medium-term implications of the outbreak.
The Governing Council is preparing for its next policy gathering, at which inflation and its measurement will be a key focus. The ECB will also update its macroeconomic projections, just as signs emerge that renewed economic challenges could lengthen the time it takes for price growth to rebound.
The region’s economy was already on a fragile footing before the coronavirus outbreak started disrupting global business and supply chains. A surge of cases in Italy this week has increased speculation about how big a hit the economy will take and what the ECB will do about it.
Policy makers are currently in the early days of a review on how the central bank operates, but President Christine Lagarde has said that won’t prevent them from taking action if needed. Speaking at a separate event on climate change on Thursday, Lagarde didn’t refer to recent economic challenges, but said central banks must devote greater attention to how environmental issues affect inflation dynamics.
Schnabel also commented on that, stating that while declining contributions from oil prices have been a major source of low inflation in recent years, a widespread shift to renewable energy could further depress price developments. Central banks would need to consider such a dilemma and the extent to which they could afford looking through energy-related price shocks.
The topic of whether and how to change the ECB’s inflation goal -- currently at below, but close to, 2% -- has already led to some discussions among policy makers, and several have publicly commented on their preferences. Executive Board member Fabio Panetta also spoke Thursday, but didn’t comment on policy.
--With assistance from Piotr Skolimowski, David Goodman and Brian Swint.
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