Bundesbank President Jens Weidmann has spoken out against the concept of flexible inflation management, in which a second overshoot of the inflation target is tolerated. Overall, such a concept does not convince him, said Weidmann on Thursday according to the speech in front of the Friends of the Ludwig Erhard Foundation. It could be misunderstood to stand still when inflation rises above target in the medium term. "It could therefore be misinterpreted as an attempt by monetary policy to put the sustainability of public finances above the goal of price stability," said Weidmann. Anchoring inflation expectations may then be even more difficult.
In such a strategy, known in technical jargon as 'Average Inflation Targeting', a central bank only has to raise interest rates when inflation has been above the target for a certain time, provided that it was preceded by a phase of too low inflation. In this way, inflation is supposed to reach the target on average without the monetary authorities having to react early to too low or increased price pressure.
Weidmann also fears that such a form of flexible inflation control is difficult to understand by the public. Against the background of the currently stronger price increase, he called on the central banks not only to pay attention to deflation risks - that is, to the danger of a dangerous downward spiral in prices, wages and investments. "It is important to me that our monetary policy does not list - neither in one direction nor in the other," he said.
The European Central Bank (ECB) is currently in the process of reviewing its monetary policy strategy.
The focus is on revising the medium-term inflation target from currently below, but close to, two percent.
Some monetary watchdogs can envision letting inflation exceed the two percent mark for a period of time.
It is pointed out, among other things, that the monetary authorities have now missed their previous inflation target for almost ten years.
In the United States, a form of "Average Inflation Targeting" is now being practiced.
There, the US Federal Reserve had given the Fed the prospect of keeping interest rates close to zero after a change in strategy until inflation was about to moderately exceed the target of two percent inflation for some time.