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Euro zone inflation doesn’t require significant policy tightening, ECB’s Lane says

  • 10 February, 2022
  • 4:46 pm EET

Euro zone inflation doesn’t require significant policy tightening, ECB’s Lane says

As pandemic-related bottlenecks in goods and labor are removed, euro zone inflation will return to trend without considerable policy tightening by the European Central Bank, according to the ECB’s top economist Philip Lane.

Lane was maintaining his long-held belief that the euro zone’s current, record-high inflation rate was only temporary, despite rising investor and policymaker pressure on the ECB to boost interest rates.

“Since bottlenecks will eventually be removed,” Lane wrote in a blog post, “price pressures should abate and inflation revert to its trend without the need for a large monetary policy adjustment.”

French governor Francois Villeroy de Galhau echoed him at a different gathering.

They were most likely attempting to reduce market expectations for an early halt to the ECB’s bond purchases and a 50-basis-point rate hike by December.

Last week, ECB President Christine Lagarde added fuel to the fire by refusing to rule out a rate hike this year. Some policymakers, according to Reuters, wanted policy changes during last week’s summit.

Lane, on the other hand, defended the ECB’s “steady-state” policy.

“If the obstacles are mostly external in character, induced by worldwide interruptions in supply or a rise in global demand,” he wrote in his blog, “the rationale underlying a hold-steady approach to monetary policy is strengthened.”

“Because monetary policy directs domestic demand, tightening monetary policy in response to an external supply shock would expose the economy to two adverse shocks at the same time.”

The ECB announced in December that it would continue to buy bonds at least until October, and that it would only hike rates when those purchases were completed.

However, this guidance is likely to alter at the central bank’s next policy meeting in March, when it will also release fresh inflation predictions, which will almost certainly climb.

ECB vice-president Luis de Guindos said at a separate event that inflation in the euro zone, which hit 5.1 % in January, will not go below the ECB’s 2 % target this year.

He backed the European Commission’s prediction for a 3.5 % average rate of price growth in 2022, noting that wage growth in the euro zone has not kept pace with inflation so far, but that negotiations – and higher increases – may have been postponed due to the epidemic.

The ECB last raised rates in 2011, in the midst of a supply shock and debt crisis, which is now largely regarded as a policy blunder.

Its current rate on bank deposits is negative 0.5 % , implying that banks are penalized to keep their excess cash at the central bank overnight.

 

ECB’s Lane sees no need for “tightening cycle”

The European Central Bank’s chief economist said on Thursday that inflation in the euro zone is unlikely to stay over its target for years, therefore the ECB does not need to start a “tightening cycle.”

“It is not a circumstance where we believe there is a high possibility of inflation being above our objective throughout our horizon,” Lane added.

“We’re looking at whether the durable basis for inflation moving to our target is there,” he explained, “but that’s very different from being concerned about inflation being above target, which would need a tightening cycle.”

 

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