Marcus Nunes/Feb 4, 2016
European Central Bank President Mario Draghi hit back at a warning from Germany’s Bundesbank that the ECB shouldn’t overreact to a sharp drop in oil prices, underlining his readiness to launch additional stimulus to shore up ultralow inflation.
In a speech at the Bundesbank’s home in Frankfurt, Mr. Draghi warned that central banks “cannot be relaxed” in the face of a series of shocks to commodity prices.
“The longer inflation stays too low, the greater the risk that inflation does not return automatically to target,” Mr. Draghi said.
Cheaper oil and other “forces in the global economy” that are holding down consumer prices “should not lead to a permanently lower inflation rate,” he said. “They do not justify inaction.”
The comments come a week after Bundesbank President Jens Weidmann urged central bankers to look through an oil-price driven drop in inflation, arguing that they shouldn’t fixate on current price levels like a “rabbit staring at a snake.”
The back-and-forth between two of Europe’s most influential central bankers underlines the debate within the ECB about how urgently the bank should respond to sharply lower oil prices.
It´s a mirror image of what happened in 2007-08, when oil prices were rising and central bankers felt “compelled” to tighten lest inflation permanently rose!
This is one more evidence against “Inflation Targeting”. It also shows how, in practice, central banks have an “asymmetric view” of the target!