Frankfurt: European Central Bank officials dismissed a proposal by International Monetary Fund economists that monetary-policy makers increase inflation targets to 4 per cent, arguing that such a shift would damage economies.
"I can only reject the idea of raising inflation rates permanently," ECB Executive Board member Juergen Stark said in a speech in Seoul.
Bundesbank President Axel Weber wrote in a newspaper column yesterday that the Washington-based lender is "playing with fire."
The criticisms suggest the Frankfurt-based ECB will ignore this month's suggestion by IMF economists led by Olivier Blanchard that central banks raise their inflation targets so that they have more scope to react to shocks such as the recent financial crisis. The ECB currently seeks to keep annual inflation rates at just below 2 per cent in the medium term.
"The ECB is the most hawkish inflation targeter out there, so it's unsurprising it doesn't look at higher inflation targets too kindly," said Geoffrey Yu, a currency strategist at UBS AG in London.
Stark called the IMF's proposal "most unhelpful" and calculated a 4 per cent inflation goal would shave "no less than" 0.5 percentage point off trend growth in the euro region.
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 called suggestions to raise the inflation target "backward looking."
Pioneered by the Reserve Bank of New Zealand two decades ago and now followed by more than 20 central banks globally, inflation targets are aimed at controlling expectations of future price pressures and providing clarity about the direction of interest rates.
The IMF's February 12 report said an increase in inflation goals may grant central bankers more leeway to respond in the event of turmoil such as a global recession, terrorist attack or pandemic.
