FRANKFURT, Sept 3 (Reuters) - Rapid technological advancescut inflation only marginally and temporarily, BundesbankPresident Jens Weidmann said on Monday, weighing in on one ofthe biggest debates in modern central banking.With much of the industrialised world struggling withanaemic inflation levels, some economists argue that rapidtechnological development keeps a lid on prices, forcing centralbanks to exhaust their firepower fighting an economic paradigmshift, and leaving them with few tools for the next downturn.But Weidmann, a powerful voice on the European CentralBank's rate-setting Governing Council, argued that a deepeconomic crisis a decade ago and the slowness of the recoveryare the main culprits - not the start of the digital age."The inflation dampening effect of digitalisation is likelyto been rather small so far," Weidmann said in the German townof Freiburg, adding that even this minor impact was a one-offduring an adjustment process."In the new long-term state of equilibrium, the potentialfor price reductions will be exhausted and its influence on theinflation rate will have disappeared," he said.Euro zone inflation has undershot the ECB's target of almost2 percent for five years, even with years of stimulus, raisingquestions as to whether monetary policy remains effective.
But ECB chief Mario Draghi has also dismissed many of thearguments about a paradigm shift, arguing that the euro zoneeconomy is still taking up hidden slack, and that it istherefore too early to throw out established economic models.A problem with low inflation is that it reduces what isconsidered a natural interest rate, so a central bank would havereduced room to cut borrowing costs in a downturn.Some have argued for a higher inflation target as a way toraise price expectations, which would then naturally increaseinflation and thus interest rates.But Weidmann flatly rejected this suggestion."I am convinced that we should continue to aim for aninflation rate below, but close to, 2 percent over the mediumterm and should not raise doubts about the credibility of ourmonetary policy." (Reporting by Balazs Koranyi; Editing by Kevin Liffey)
Messaging: balazs.koranyi.thomsonreuters.com@reuters.net)) Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.