Portugal: Vitor Constâncio urges central banks to revise inflation target to 3%

The former head of the Portuguese central bank and former ECB vice-president Vitor Constâncio has advocated a revision of the central banks inflation target for the future from 2% to 3%.

Constâncio made the remarks at the annual congress of the Portuguese Economic Order, titled "Portugal and the challenges of the present: the role of economists and managers," at the Calouste Gulbenkian Foundation in Lisbon.

He said: "Once confidence has recovered and inflation has fallen to around 2%, central banks will have to revise their inflation target and adopt a higher target of 3%.

The former head of Portugal's central bank and former ECB vice president explained that keeping the 2% target' 'could lead to a permanent tightening of monetary policy, which would have a negative impact on economic growth.

According to Constânciu, the 3% target would avoid lowering inflation and lowering interest rates to the zero bound during periods of recession, and would give more room for monetary policy to cut interest rates during such periods.

The former bank governor also sees "almost inevitable small reductions" both in the euro area and later in the United States.

As justification for the outlook for the eurozone, he pointed to the inversion of the interest rate curve, the credit squeeze by banks, PMI values and the decline in residential and commercial real estate prices in many countries, while at the same time reducing' 'construction activity within 12 months.