European Central Bank governor Klaas Knot warns of higher inflation

European Central Bank governor Klaas Knot warns of higher inflation

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None What the Front Line of U.S. European Central Bank policymaker Klaas Knot stepped up his warnings about inflationary risks in Europe, saying prices could rise faster than expected because of supply disruptions and a pickup in wages.

The Dutch governor, widely observed 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. In the short to medium term, in the upper right there are mainly downstream 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 support the region s fragile recovery after the Covid-19 recession.

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

Consumer prices in the 19 nations 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 about the future of stimulus.

The current baseline scenario of the ECB is consistent with ending the pandemic emergency procurement program in March 2022, Knot said. However, this does not 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 changed to a little after his remarks.

Lagarde reiterated earlier Thursday that it remains essential to not withdraw policy support too early.

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

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