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Economists expect central bankers to keep inflation target at current level

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Economists expect central bankers to keep inflation target at current level

An inflation target of 2% may prove unrealistic for some countries and regions, but economists don't expect central banks to raise it any time soon.

That consensus has formed despite a global growth rate that has been on a sustained upswing, leaving central banks with the dilemma of needing to normalize rates without causing serious market reactions, the economists said at an Institute of International Finance meeting in Washington, D.C., on Oct. 13.

"This should lead us to think maybe it's irrelevant what the Fed is doing," said Lorenzo Bini Smaghi, chairman of Société Générale, speaking of generally low inflation worldwide.

"Maybe long-term rates are due to fundamental factors," he said, citing a savings glut and the flow of funds looking for safer assets as factors that could account for the data.

Members of the Federal Open Market Committee have suggested rethinking the 2% inflation goal, said Randall Kroszner, a University of Chicago economics professor who was on the Board of Governors of the U.S. Federal Reserve during the financial crisis.

The problem with changing the target is that it could impair central banker's credibility with market participants, he suggested.

Jacob Frenkel, Chairman of JPMorgan Chase International, who served on the executive board of the European Central Bank, agreed that clarity and credibility were the main issue, rather than the specific target.

"We've heard about propositions to raise the inflation target to 4%, as if this is nirvana," he said. "If you systematically don't go to where you told them you will go, it will detract from credibility."

Frenkel said he also believed that the consumer price index didn't capture all inflation, including asset managers' investments in equities that many analysts consider to be overvalued.