ECB policy review: should avoid premature tightening

ECB policy review: should avoid premature tightening

FRANKFURT Reuters -- The comments made by the ECB policymakers in the run up to a crucial Dec 16 policy meeting that will decide on the bank's policy stance once emergency bond purchases end in March.

There is a clear divide between rate-setters and inflation in the euro area, which has hit the lowest level since 1997, and those who argue that the spike in price growth is temporary and will subside on its own.

When faced with passing or supply-driven inflation shocks, we must not rush into a premature tightening.

When inflation pressure is expected to fade as is the case today, it does not make sense to react by tightening policy. The tightening wouldn't affect the economy until after the shock has passed. An abrupt tightening of monetary policy today would not lower the currently high inflation rates, but it would help to slow down the economy and reduce employment over the next couple of years and reduce medium-term inflation pressure.

Given our assessment that the medium-term inflation trajectory remains below our 2% target, it would be counter-productive to tighten monetary policy at the current juncture.

A shift in the wage level is not indicative of a trend shift in the path of underlying inflation as part of the adjustment to a transitory unexpected increase in the price level. We are not likely to see interest rate hikes next year or even for some time thereafter.

It is better to err on the side of caution when it comes to adjusting our monetary policy in the current context.

We want to avoid a premature tightening of monetary policy in response to inflation running above the target, when such deviation is deemed to be temporary. The risks to inflation are skewed to the upside.

I certainly wouldn't take a policy stance over a too long period of time. That would be a mistake. The upside risks dominate the inflation outlook and have recently become more clear, according to my perspective.

In Germany, the complaints about labour shortages have gone up, as well as among our European neighbours.

In the future, such tensions on the labour markets could make it easier for workers and trade unions to push through noticeably higher wages. These transitory inflation pressures are not necessarily short-lived. We have come to realize that the inflationary pressures from these sources last longer than originally thought.

We can't make long-lasting unconditional commitments that could be incompatible with how the inflation outlook develops. Bottlenecks may last longer than expected in the year 2022. There is a chance that inflation will not go down as quickly as predicted.

I am confident that net purchases will continue throughout the next year. I don't know that beyond that. Flexibility is at least as important as volume of asset purchases. This is why increasing the net purchases of APP after PEPP is a possibility, but not yet a necessity. The flexibility in three ways is what makes PEPP so successful. The first component relates to timing. There is no fixed amount per month. Such flexibility could easily be transferred to the APP.

We will do what we said, and as it is already expected by the financial markets, one should not fear too much cliff effects.