The European Central Bank (ECB) has rejected an proposal by the IMF to raise target for inflation rates to 4% from the current 2%.
The idea was that by allowing for higher potential inflation, the ECB would have more room to stimulate the economy in the event of a crisis, while staying within its target.
“I can only reject the idea of raising inflation rates permanently,” ECB Executive Board member Juergen Stark said in a speech in Seoul today. Bundesbank President Axel Weber wrote in a newspaper column today that the Washington-based lender is “playing with fire.”
Weber, a contender to succeed ECB President Jean-Claude Trichet next year, said in the Financial Times Deutschland that faster inflation causes “more damage than good” and warned the IMF’s discussion threatens to undermine the credibility of central banks.
Executive Board member Lorenzo Bini Smaghi yesterday said the proposal to raise the inflation target “backward looking.” Cypriot central banker Athanasios Orphanides this month called the proposition “counter-productive” and a “most unfortunate suggestion” as it may weaken the “hard-fought achievement” of anchoring inflation expectations.
Euro bulls are lucky, had it gone the other way then it would have likely been pretty bad news for them. German exporters are not so lucky — they probably wouldn’t mind a weaker Euro in the longer-term.