The European Central Bank should follow the lead of the US Federal Reserve by accepting an overshooting of its inflation target to make up for many years of sluggish price growth, said one of its top officials.
Olli Rehn, who sits on the ECB’s interest rate-setting council as governor of Finland’s central bank, told the Financial Times changes in the eurozone labour market and world economy had weakened wage inflation pressures and meant “the economy can cope with lower levels of unemployment . . . without rapid inflation”.
“If this is the case, from the point of view of economic and social welfare it makes sense to accept a certain period of [inflation] overshooting, while taking into account the history of undershooting,” Rehn said. “That is why, in addition to price stability, a focus on full or maximum employment makes sense in the current context of a lower natural rate of interest.”
The ECB has failed to…