ECB’s Schnabel Says Temporary Inflation Overshoot Necessary
(Bloomberg) -- European Central Bank policy maker Isabel Schnabel said it is “necessary and proportionate” that inflation overshoots the institution’s goal for a while as the economy recovers, remarks that may spark a pushback by some colleagues in the Governing Council.
The Executive Board member said on Saturday that she sees “growing evidence” inflation expectations are finally starting to align with the ECB’s target of just-under 2%, but that continued monetary and fiscal stimulus is needed to ensure that happens.
“Years of repeated overprediction of the future path of inflation require that higher inflation prospects need to visibly migrate into the baseline scenario, and be reflected in actual underlying inflation dynamics,” she said. “Such patience may lead to inflation outcomes being moderately above our aim for a temporary period of time. This will be a necessary and proportionate requirement to set the conditions to escape low inflation.”
The comments come as the ECB prepares for a special meeting this week to debate changing its price-stability strategy. While some on the 25-member council favor something akin to average inflation targeting -- which would allow an overshoot after periods of low price growth, and which the U.S. Federal Reserve has introduced -- others have steered against it.
Bundesbank President Jens Weidmann said lat week that maintaining stimulus when price growth is above target could undermine the ECB’s credibility.
Dutch central bank Governor Klaas Knot said in an interview published earlier Saturday that policy makers may be underestimating the potential for accelerating inflation to become entrenched, and that the ECB’s 1.85 trillion-euro ($2.2 trillion) pandemic bond-buying program should end around March 2022 as scheduled.
“We should not overestimate our capacity to determine in advance what is temporary inflation and what is not,” he told Dutch newspaper NRC. “There are other scenarios conceivable than our base case of persistently low inflation. Inflation is not dead.”
Schnabel said fears of too-high inflation are “unfounded,” and that pressures will fade next year, with the ECB still predicting price growth over the medium-term below its goal. But she noted that market indicators suggest upside risks, and cited three reasons why that might happen.
- The impact of the reopening of the euro-area economy could be larger than expected, with even short-lived supply-demand imbalances pushing companies to raise prices, and consumers willing to pay them after building up hundreds of billions of euros in excess savings
- The balances might persist, with excess savings and public spending plans keeping demand elevated for a sustained period, while supply chains are disrupted because of the different pace at which the pandemic recedes across countries
- Second-round effects as workers seek higher wages to compensate for higher prices, and as companies strive to overcome a skills mismatch in the post-pandemic economy
“Rising long-term inflation expectations suggest that the exit from the pandemic provides, for the first time in many years, some ground for cautious optimism,” she said. “The euro area economy may eventually escape the low growth, low inflation environment that has dominated the macroeconomic landscape for most of the past decade.”
ECB President Christine Lagarde told France Inter radio on Saturday that while the euro-zone economy is “clearly in a period of recovery” and may reach its pre-pandemic size sooner than expected, current price pressures are “mostly transitory.”
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