LJUBLJANA Reuters - Eurozone inflation is at risk of overshooting projections so that the European Central Bank needs to monitor price growth and will end its emergency stimulus programme in next March, ECB policymaker Bostjan Vasle told Reuters.
Inflation has failed to exceed the ECB's target due to a long list of one-off factors, leading to fears that what was once considered a temporary price rise could become permanent through higher wages and corporate pricing structures.
There are early indicators that in certain regions and parts of the economy, the risk regarding the labour market could become more material, Vasle, a conservative member of the ECB Governing Council, said in an interview.
The labour market is in short supply in some parts of the economy and if this trend develops or it goes to other sectors, it could pose a risk for inflation, Vasle said. I think that second round effects are very detrimental. While there is no anecdotal data yet, hard data from businesses indicates that labour shortages are becoming more pronounced and workers are demanding higher wages, Vasle added.
Fearing that the COVID – 19 pandemic-induced recession would lead to a self-reinforcing deflation spiral, the ECB launched unprecedented stimulus last year to prop up the euro zone economy.
Although the 19- country bloc has managed nearly all of the lost output, the ECB has yet to dial back support significantly, even as other Central Banks have either started to tighten their policy or signalled imminent moves.
The ECB will need to decide in December whether to pull out its 1.85 trillion euro Pandemic Emergency Purchase Programme and Vasle joined a growing chorus of policymakers backing its end.
If these trends continue then in next March it will be appropriate to end PEPP, as announced when the programme was implemented, Vasle said.
It is also important to emphasize that even when we decide to end it, we'll continue to provide plenty of liquidity to the economy with our other instruments. With inflation on the rise, markets are now pricing in an ECB rate hike before the end of next year, an aggressive stance that appears out of sync with the ECB's interest rate guidance.
I think we made clear what our intentions are and that will be the most important developments that will influence our decisions, he said. So, at the moment, I wouldn't put too much emphasis on this shift. He also dismissed concerns about rising government bonds yields and argued that real-world, or inflation-adjusted, financing conditions remain favourable as defined by the ECB.
Vasle would not be drawn on whether the ECB should top up other instruments to compensate for lost asset purchase volumes but argued that the central bank cannot maintain all of the flexibility embedded in the emergency scheme.
I'm not against a discussion regarding addition of additional flexibility to our existing instruments, Vasle added. I'd like to stress, however, that in ordinary times this type of extraordinary flexibility would not be warranted. The ECB currently permits itself to buy up to a third of each member country's debt and has to buy broadly in line with the size of each economy, rules that may be up for discussion at its December 16 meeting. Issuemakers will also meet next week when no change in policy is likely.
But increasing the proportion of supranational debt on the ECB's portfolio is an easier move.
This is a natural suggestion and I expect it to be part of our discussions, Vasle said.