VIENNA Central banks should learn to live with inflation rates that persistently miss their targets rather than fuel debt with increasingly aggressive stimulus policies, a top economist at the Bank for International Settlements said on Wednesday.
Major central banks across the developed world have pushed interest rates to zero or below and printed trillions of dollars to stimulate their economies, driving bond yields to record lows but failing to significantly boost inflation.
Claudio Borio, head of the monetary and economic department at the BIS and a long-standing sceptic of ultra-easy policies, said central banks may need to give themselves more time to reach their inflation goals because their policies may threaten long-term economic stability.
"It is quite possible that a financial stability-oriented monetary policy may require greater tolerance for persistent deviations of inflation from target," he told a central bankers' gathering in Vienna.
"Such a policy does not require changing mandates... but it may require at least refinements in how the mandates are put into practice, including the horizon for achieving inflation objectives."
Despite printing over a trillion euros ($1.12 trillion) and adopting a range of measures to stimulate lending, the European Central Bank has missed its target of almost 2 percent inflation for over three years.
A wait-and-see attitude towards more stimulus is also gaining traction inside the ECB, with board member Sabine Lautenschlaeger saying on Tuesday the bank should hold off on fresh moves and give earlier measures time to work.
Borio argued that, at a time when inflation is kept low by globalisation and technological advances, continued stimulus risks creating a situation in which debt is difficult or impossible to repay, or "debt trap".
"A debt trap would threaten and make it hard to raise interest rates without causing damage to the economy," he said. "The mix of balance sheet recessions and a stubborn disinflation process can be toxic."
He cautioned that he did not imply this reflected the current situation, but argued the hypothesis warranted greater attention.
(Reporting By Francesco Canepa Editing by Jeremy Gaunt)