An ECB member says monetary policy should not be exaggerated in the face of small deviations in inflation

The European Central Bank (ECB) should keep interest rates stable as long as inflation is close to 2% and should not try to tighten monetary policy in case of small deviations from its target, Austrian central bank President Martin Kocher said on Thursday.

Although inflation has hovered around 2% for months, projections show it will fall to 1.7% next year before rebounding in subsequent years, raising concerns among some ECB members that it will miss the target.

“For me, this is close to the target. We should not overreact in any direction,” Kocher, one of the new members of the Governing Council that sets euro zone interest rates, said at a conference. “If you are slightly above target, in my opinion it is not advisable to overreact.”

The ECB has held the deposit rate stable at 2% since June and markets see almost no chance of further easing this year, although investors still see a one-in-two chance of a permanent cut by next June.

Kocher, repeating an argument made by several colleagues, said the ECB should maintain this position and act only in the event of a new shock that would change the outlook beyond current expectations.

“I think there’s a good argument for not adjusting monetary policy rates, for trying not to overdo what we’re doing, as long as we’re close to 2%, as long as there aren’t any external shocks,” Kocher said.

However, he acknowledged that uncertainty remains exceptional and that economic data over the summer has been noisy, making it difficult for ECB members to get clarity on the outlook.

But growth is stable around 1%, a level that is not spectacular but remains close to the currency bloc’s production potential, Kocher added.

Source: Terra

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