Jean-Claude Trichet’s European Central Bank hasn’t had much success hitting its inflation target. The fault may lie with the goal itself, Bloomberg reports.
“The ECB’s keeping up a fiction,” says Joachim Fels, co- chief economist at Morgan Stanley in London. “The trade-off between growth and inflation has really changed. They should be as open as possible by adjusting the target.”
The Frankfurt-based central bank, marking its 10th anniversary 1 June, has failed in each of the last eight years to achieve its aim of bringing inflation below 2%. The goal may become even more elusive as fast-growing eastern European countries adopt the euro and push up costs within the region at the same time it faces price jolts from emerging markets in Asia.
That forces an unpleasant choice on President Trichet and his colleagues: They can keep striving to force inflation lower by holding interest rates higher, at the cost of crippling faltering economies such as Italy’s. Or they can yield to demands to set an easier target – something Trichet says he won’t consider “for one second” – and risk letting inflation erode stronger economies such as Germany’s.
Sticking with the current number may result in “a pyrrhic victory by pushing inflation within target but having destroyed the real economy,” says Thomas Mayer, chief European economist at Deutsche Bank AG in London.