FRANKFURT, Sept 22 The European Central Bank
need to have a flexible approach to the time needed to reach its
inflation objective to make sure its policies are aligned with
financial stability objectives, Governing Council Klaas Knot
said on Thursday.
The ECB is coming under increasing criticism that its
massive assets buys, intended to kick-start inflation, are
inflating asset prices, distorting financial markets, and
leading to financial instability.
Indeed, an influential economist at the Bank for
International Settlements argued that central banks should learn
to live with low inflation rather than fuel debt with
increasingly aggressive stimulus measures.
"The first thing you need to do in this context is use the
medium term perspective in monetary policy in a sufficiently
flexible fashion," Knot told a conference in Frankfurt.
The ECB targets inflation, now hovering near zero, at just
under 2 percent over the medium term and has long argued that
the timing depends on the size of the inflation shock.
"In such circumstances, financial stability and price
stability are aligned, there is no contradiction, as long as you
regard the time horizon... as sufficiently long," said Knot, who
also heads the Dutch central bank.
Knot, who has in the past criticised the ECB's measures,
said that the ECB's current policy, described as 'leaning
against the wind' is needed given the risk of deflation risk
after the bloc's economic crisis.
"The only periods in which negative inflation truly
translates itself into negative, self-reinforcing deflationary
spirals, is after a financial bubble has burst," Knot said.
"So there is strong case, that if the universal price of
leverage is too low, you have a system wide build up of risks,
then leaning against the wind monetary policy is optimal," he
(Reporting by Balazs Koranyi; Editing by Toby Chopra)