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Why Central Banks Are Raising Their Inflation Targets
Description
Episode 50 of Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates. Today, Lucas and Luna dig into a quietly seismic shift in central banking: the move to raise long-term inflation targets. The Bank of Canada recently completed a five-year framework review and set a new 2.5 percent target, up from 2.0 percent. The Federal Reserve has internally debated a similar move in its 2025 review. Lucas explains the logic—giving central banks more room to cut rates during downturns, reducing the risk of hitting the zero lower bound—and the risks: unanchored expectations, political blowback, and the credibility loss from moving the goalposts. Luna asks whether 3.0 percent might be optimal, and they discuss the findings of Olivier Blanchard's 2023 paper on optimal inflation. The episode also touches on why the ECB and Bank of Japan are watching these debates closely. Specific, grounded, and timely for June 2026.