ECB's Praet Discusses Why Bank Is 'So Determined' To Raise Inflation

Peter Praet, a member of the Executive Board of the European Central Bank delivered a speech on Monday in Rome, Italy. Related Link: ECB Continues Down Rate Reduction Road Image Credit: Public Domain

Praet's speech focused not so much on what tools the central bank will utilize to bring inflation "below, but close to, 2 percent", rather why the central bank is "so determined" to reach the target rate.

According to Praet, an inflation rate closer to 2 percent than to 0 percent "supports product and labor market functioning." On the product market side, an inflation rate closer to 2 percent allows "relative prices to adjust more easily across goods and services."

On the labor front, a 2 percent inflation provides "an important margin of adjustment in the face of shocks."

As such, the European Central Bank needs to remain focused on controlling inflation, and do so "forcefully" if necessary.

"Decades of experience have confirmed the importance of price stability for macroeconomic stability and sustained economic growth," Praet said in his speech. "That is true both when inflation is too high and when it is too low. The prolonged period of low inflation we are in today has increased the risks that inflation misses might become persistent, which would be deeply damaging for the economy. This is why we have reacted so forcefully to secure our objective – and will continue to do so in the future if necessary."