HAMBURG, Germany (MNI) – Assuring price stability remains the main
goal of central banks and keeping inflation expectations anchored is of
utmost importance, ECB Governing Council member Christian Noyer said
Friday.

The financial crisis has not invalidated the general principles
underlying the design of monetary policy strategies during the previous
two decades, the governor of the Bank of France said at a conference
here.

“This world-wide monetary crisis cemented the contemporary
agreement that pursuing price stability ought to be the fundamental goal
of monetary policy,” Noyer stressed.

“Since inflation reflects, to a large, or even dominant extent, the
economic agents’ inflation expectations, it follows that in order to
keep inflation under control it is of paramount importance to keep
inflation expectations firmly anchored,” Noyer said, reaffirming the
ECB’s mantra.

Still, the Governing Council member acknowledged that the financial
crisis had exposed several shortcomings in the monetary policy framework
of the pre-crisis era.

“Not only maintenance of output and inflation stability does not
automatically deliver financial stability, but on the contrary, the very
same monetary policy which successfully keeps output and inflation
stable in the short run may well lead to the build-up of financial
imbalances and asset price bubbles which threaten macroeconomic
stability at longer horizons,” he cautioned.

Moreover, “committment to mopping up such bubbles by means of
aggressive interest rate cuts implemented after their bursting has been
revealed as most unwise,” Noyer argued.

The recent experience has demonstrated that such a strategy may
well be unable to shield the economy from the costs of the bubble’s
bursting — “costs which in many cases may simply be staggering,” the
central banker warned.

“Also, the sheer size of the macroeconomic shock associated with
the bursting of the bubble may be sufficient to plunge the economy to
the zero lower bound,” Noyer reasoned. “These are the bad news,” he
said.

The “good news” is that many of the principles underlying the
pre-crisis monetary policy frameworks “are still perfectly valid,” the
central banker remarked, “so that, in a sense, we do not have to
reinvent the wheel.”

–Berlin bureau: +49-30-22 62 05 80; twidder@marketnews.com

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