ECB’s brain trust spars over inflation outlook

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  • Schnabel sees risk of permanent inflationary pressures
  • Lane sees adversity in energy cost, fiscal tightening
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FRANKFURT, Oct 7 (Businesshala) – Two of the European Central Bank’s leading economic thinkers on Thursday disputed how likely the recent sharp rise in euro area inflation is likely to be permanent.

Philippe Lane and Isabel Schnabel, who lead the economic debate on the ECB’s board, both reiterated the ECB’s official line that the spike in price hikes will ease next year as the after-effects of the pandemic fade.

But they differed sharply on the risks surrounding that prediction, with Schnabel warning of “more persistent inflationary pressures” and Lane of forces that could drag price growth down.

“It is too early to say whether the current price dynamics will fully subside next year,” Schnabel said at a joint conference organized by the ECB and the Cleveland Federal Reserve.

“There are several sources of uncertainty that could exacerbate more persistent inflationary pressures.”

Among them, he listed inflation expectations and possible changes in people’s behavior when it comes to setting wages and prices.

Speaking later at the same event, Lane denied that the future was so uncertain.

“Who knows us?’ Shouldn’t fly into the narrative of ‘the uncertainty is so widespread that we don’t know’ – it is not,” said the ECB’s chief economist.

“There are very solid reasons to believe that a lot of this has to do with the reopening of the economy. There are very solid reasons to believe that there is a significant transitory component.”

He said the recent increase in energy costs and the withdrawal of financial aid measures related to the pandemic were unfavorable for the economy.

Schnabel acknowledged that until now there was “no indication” in market prices and in economists’ forecasts that high inflation would be trapped.

But Lane went further, saying that the outright increase in wages as a result of high inflation this year would not push the ECB into a tougher policy.

The ECB is widely expected to close its emergency bond purchases in March and it is now debated how much debt it will continue to buy under its regular schedule after that date.

reverse risk

Accounts from the ECB’s latest policy meeting on Thursday showed policymakers had already begun to worry about upside risk when they met on 9-10 September.

“The risks to the inflation outlook … were widely considered to be upward sloping,” the accounts said, with policymakers arguing that the ECB should keep an eye on a potential inflation “regime change”.

ECB chief Christine Lagarde played down inflation fears in a press conference after the meeting, but has since struck a more balanced tone, while several of her colleagues have flagged their concerns in private and public conversations.

New ECB forecasts unveiled at the meeting put inflation at 2.2% this year, 1.7% next year and 1.5% in 2023.

But policymakers at the gathering also wondered whether their projection models were working well given the huge inflation this year.

“This raised doubts about how well the models relying on projections were able to capture the structural changes implied by the pandemic and the impact of the ECB’s new monetary policy strategy at present in the economy,” the ECB said.

Inflation in the euro area peaked at 3.4% in September, according to Eurostat Flash estimates.

emergency assistance

Rate setters also debated a major cut in the monthly pace of their Epidemic Emergency Procurement Program (PEPP), and some policymakers even argued that markets were already prepared for the end of PEPP without significant impact on financing conditions. had done

“It was argued that markets were already expecting an end to net asset purchases under PEPP by March 2022,” the accounts showed. “The point was made that, even without the PEPP, the overall monetary policy stance remained overly accommodative.”

In the end, the ECB opted for a more cautious move, simply deciding to cut its emergency bond buys “moderately” for fear of upsetting the markets.

Editing by Hugh Lawson and Andrea Ricci


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