Former ECB Governing Council member Lorenzo Bini-Smaghi touches on the debate but sovereign QE in a column in today’s FT and favors action but he focuses on how the ECB could limit the number of government bonds it will ultimately be forced to purchase.
Bini-Smaghi looks at how the ECB can tweak its mandate to send a signal to markets about its willingness to counter deflation.
At the start of European monetary union the definition of price stability was simply “below 2 per cent”. The main reason might have been that the ECB was a newly created institution which had to build its reputation as an inflation fighter. Indicating a precise target might have led inflation expectations to remain excessively high for too long.
The definition was reviewed in 2003. The words “but close to” were then added to the “below 2 per cent”. The intention was to make it clear “that not only inflation above 2 per cent but also deflation (ie, price level declines) is inconsistent with price stability”. This seemed appropriate at that time as inflation was temporarily falling. But the fears of deflation or low inflation subsided, while inflation expectations remained well anchored.
What the 2003 change does not clarify is whether a positive but low level of price increase is consistent or not with price stability. Is 0.5 per cent inflation consistent with price stability? Probably not. What about 1.5 per cent?
The ECB is able to make its own mandate and he suggests a 2% inflation target +/- 0.5 percentage points.
Personally, I doubt that helps but it wouldn’t hurt either so why not.
