Change monetary policy strategy
Top economist demands a change of strategy from the ECB
6/2/2023 1:03 p.m
Just recently, Christine Lagarde emphasized that the ECB would resolutely stick to its course until inflation was back at two percent. However, DIW boss Fratzscher demands that the ECB should better lift its inflation target. In his opinion, the time of multiple crises requires a rethink.
Berlin’s top economist Marcel Fratzscher proposes a change of strategy for the European Central Bank (ECB) in combating inflation. With its dual mandate of price stability and full employment, the US Federal Reserve has significantly more flexibility than the ECB, which has committed itself to a symmetric mandate of two percent inflation in the medium term: “Many central banks will continue to find it difficult to achieve price stability. The ECB should therefore better give up its quantitative inflation target,” writes the President of the German Institute for Economic Research (DIW) in a guest article for the “Handelsblatt”.
The pandemic, energy crisis and banking problems impressively demonstrated the extent to which central banks are increasingly losing control of their price stability mandate. These times of multiple crises in an increasingly globally networked economy required a rethink.
From the researcher’s point of view, it would be wiser to abandon a quantitative inflation target and anchor financial stability much more explicitly in the strategy. An inflation rate of, for example, three percent is not economically harmful per se, as long as monetary authorities communicate that they agree with such an inflation rate and that economic actors can rely on a stable inflation rate and financing conditions. An adjustment of the monetary policy strategy is necessary: ”The sooner the central banks start, the better.”
Steinbrück: The ECB is partly to blame for high inflation
Fratzscher, who once worked for the European Central Bank,’s proposals contrast with recent statements by ECB boss Christine Lagarde. She stressed: “We will continue – determined and undeterred – until we see that inflation returns to our medium-term target of two percent in a timely manner.”
Former Finance Minister Peer Steinbrück blames the European Central Bank’s monetary policy for the high inflation. “In my opinion, the ECB reacted too late. It operated the liquidity pump for a long time.” Steinbrück said that on the sidelines of the Mallorca Economic Forum in an interview with RTL/ntv. The fact that the central bank has raised the key interest rate is correct and he expects further increases. “I’m pretty sure that at least 4 or 4.25 percent will be reached in the course of this year,” said the SPD politician.