Europe at risk of higher inflation; ECB’S PEPP should end in March: ECB’s Knot

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FRANKFURT, Oct 14 (Businesshala) – Euro zone inflation could exceed expectations in the short and medium term, and the outlook for a price hike warrants the end of the European Central Bank’s emergency bond purchases next March, the Dutch central bank said. The leading class Knott said on Thursday.

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Inflation has risen on a long list of one-time developments this year, but a growing number of observers, including the International Monetary Fund, recently warned that price hikes could be more sticky and more permanent than once thought.

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“Headline inflation risks are again sloping upward,” Knott said in a speech. “The upside risk, in the short to medium term, is primarily linked to more persistent supply-side constraints and stronger domestic wage-price dynamics.”

A Hawk Knot of the ECB’s Governing Council argued that even if these upside risks are not there, the bank’s baseline projection alone overstates the ₹1.85 trillion pandemic emergency purchase program.

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“The current baseline scenario of the ECB is in line with the PEPP being terminated in March 2022,” he said. “While we are currently looking at options to ease the transition from PEPP, incoming data should clarify how risks play out around our current inflation baseline.”

However, Knott appeared to be relaxed about the long-term inflation outlook, allaying some market fears that prices would spiral out of control.

He argued that the inflation outlook was now “back on track” and that market-based inflation expectations were keeping price increases broadly in line with the ECB’s own 2% target.

“I very much welcome these developments,” Knott said. “Coming from a longer period of aftershocks and deflation risks, that’s good news.”

Despite unprecedented stimulus, including abundant asset purchases, concessional loans to banks and deeply negative interest rates, the ECB has lowered its inflation target over the past decade.

The bank’s baseline projection now sees inflation approach 4% at the end of the year before falling below the target in 2022.

Reporting by Balazs Koranyi; Editing by John Stonestreet

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