Wed, June 29, 2022


ECBs Lagarde sees inflation below 2% target in medium term

European Central Bank President Christine Lagarde doubled down on her assessment that euro-area inflation will ease as economies rebound, falling back below the 2% target in the medium term.

"As the recovery continues and supply bottlenecks unwind, we can expect the price pressure on goods and services to normalize," Lagarde told European Parliament lawmakers Monday. "We do see wage growth next year potentially rising somewhat more than this year, but the risk of second-round effects remains limited."

Inflation in the currency bloc is the fastest since 2008, fueled by higher energy prices, supply-chain disruptions and other pandemic-related effects. While many economists agree it will fall back below target in 2023, there's consternation in some corners of the region about surging prices.

Lagarde said ECB action now to curb price gains wouldn't be the appropriate response, citing the "time horizon within which monetary policy is potent."

"If we were to have any kind of tightening approach to the current situation, it would actually do more harm than good," she said. "It would begin having an impact at a time when inflation is actually returning to lower levels."

The ECB is set to decide on the future of its monetary stimulus at a meeting next month, when it also gets new economic projections. Its $2.1 trillion (1.85 trillion-euro) pandemic bond-buying program is due to end in March, and a boost to regular asset purchases is being debated.

"Even after the expected end of the pandemic emergency, it will still be important that monetary policy -- including the appropriate calibration of asset purchases -- supports the recovery throughout the euro area and the sustainable return of inflation to our target," Lagarde said.

She reiterated that any interest-rate increase next year, as implied by recent financial-market trading, is "very unlikely."

"I don't think I will venture into 2023, but for 2022 I repeat that point that I made at the time," she said, referring to a speech earlier this month in Lisbon.

In a sign of how the inflation debate is heating up, Deutsche Bank CEO Christian Sewing urged the ECB to act against price pressures, saying his economists don't agree that the issue is temporary.

"The supposed panacea of recent years -- low interest rates and seemingly stable prices -- has lost its effect," Sewing told a conference Monday. "Now we're fighting the side effects."

At the same event, DZ Bank co-chief Cornelius Riese advised the central bank to behave less like Icarus, the figure from Greek mythology who flew too close to the sun.

Complicating the math for policy makers is a fresh spike in Covid-19 infections that may lead to new restrictions on economic activity. Austria has already imposed a lockdown for those who haven't been vaccinated. German parties that are currently negotiating a coalition agreement are also considering tighter measures.

These risks, combined with drawn-out supply interruptions, will probably lead the ECB to maintain its loose monetary policy next month, with an interest-rate increase possibly still a long way off, HSBC economist Simon Wells said Monday in a report to clients.

"The challenge is not over yet," Lagarde said. "Not only the course of the pandemic, but also the decisions taken by policy makers will continue to determine the strength of the recovery."

Published : November 16, 2021

By : Bloomberg