ECB Focus on 2% Inflation Target

FRANKFURT (Reuters) – The European Central Bank (ECB) should maintain its medium-term focus on achieving a 2% inflation rate, as stated by French central bank chief Francois Villeroy de Galhau on Wednesday.

With inflation approaching this target, ECB policymakers are evaluating the extent of flexibility around the 2% goal and plan to review this issue next year, among other topics.

In a speech at the London School of Economics, Villeroy emphasized that a central bank with a medium-term orientation does not need to react immediately to short-term deviations, but should instead address inflation dynamics that could threaten the target:

> "If inflation is above target, but converging at a sufficient pace, this may not call for action."

He explained that maintaining a precise 2.0% inflation rate at all times is neither realistic nor necessary. The key factor, he argued, is the trend and persistence of inflation fluctuations rather than the exact level of deviation at any one point.

Currently, inflation has eased to 1.7% and may fluctuate around 2% in the upcoming months, with some policymakers optimistic about overcoming excessive inflation by mid-next year. However, concerns remain that inflation may undershoot the 2% target in the longer term due to weak growth and tight interest rates set by the ECB.

Villeroy insisted that for the ECB's approach to be effective, it must clearly communicate its medium-term objectives and the strategies to revert to the target:

> "A too vague medium-term objective without a clear roadmap is a blurred signal that would ultimately undermine credibility."

He added that while various supply shocks might render inflation unpredictable, focusing on underlying figures could provide better insights into actual price pressures, allowing the bank to adapt its approach as necessary. Nonetheless, he maintained that headline inflation remains the primary target, as it is more comprehensible to consumers.