ECB’s Knot Warns Euro-Area Price Surge May Exceed Expectations

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European Central Bank policy maker Klaas Knot stepped up his warnings about inflationary risks in the euro area, saying prices could rise faster than expected because of supply disruptions and a pickup in wages.

The Dutch governor, widely seen as one of the more hawkish members of the Governing Council, added that investors appear to be taking the possibility of higher inflation seriously. After a period of setbacks and the threat of deflation, “this is good news,” he said on Thursday.

“Risks for headline inflation are again tilted to the upside,” Knot said in a webinar. “Upside risks, in the short to medium term, are mainly linked to more persistent supply side bottlenecks and stronger domestic wage-price dynamics.”

The comments imply more concern about the prospects of higher inflation than President Christine Lagarde, who has repeatedly highlighted the current spike is transitory and put more weight on the need for the ECB to continue supporting the region’s fragile recovery from the Covid-19 recession.

The remarks also precede a major debate at the ECB as it prepares for a transition to post-pandemic stimulus at a time when global counterparts increasingly focused on the threat of a price spiral are removing support. The Frankfurt-based central bank is expected to announce the next steps for its emergency bond-buying program in December.

Consumer prices in the 19-nation currency bloc are currently increasing at an annual pace of 3.4%, far faster than the ECB’s 2% goal. 

Some ECB policy makers -- including Knot -- have recently started to warn that price pressures could become more persistent, setting the scene for an intense discussion on the future of stimulus.  

“The ECB’s current baseline scenario is consistent with ending the pandemic emergency purchase program in March 2022,” Knot said. “This does not, however, mean the end of loose monetary policy.”

Knot said that the central bank’s efforts to create a durable inflation trend may imply exceeding 2% for some time, but he added that it would not be “proportional to use asset purchases to actively strive for such an overshoot.”

The euro was little changed after his remarks. 

Speaking earlier on Thursday, Lagarde stressed that it remains crucial to not withdraw policy support too early. 

“So far, there is no evidence of significant second-round effects through wages and inflation expectations in the euro area remain anchored,” she said.

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