INCREASING central banks’ inflation targets might stimulate growth in the very short run, but would lead to a dangerously volatile economy in future, the European Central Bank’s (ECB) top economist Peter Praet warned yesterday.
He joins policymakers including Sir Mervyn King and Adam Posen in opposing suggestions made by incoming Bank of England governor Mark Carney that the two per cent inflation target could be changed or scrapped.
Because central banks say they cannot set interest rates below zero, it is difficult for them to loosen policy further in an effort to stimulate growth.
Proponents of a higher inflation target argue higher prices mean real interest rates would be pushed down, stimulating growth.
“Inflation impinges on a large array of economic activities. For example, a household’s decision to consume today or instead save and consume in the future; a worker’s decision to supply labour; or a firm’s decision to invest,” Praet told a business conference in Copenhagen.