Stock Groups

ECB policymakers acknowledge growing inflation risk By Reuters


© Reuters. FILE PHOTO – The European Central Bank’s headquarters are pictured in Frankfurt (Germany) on July 8, 2020. REUTERS/Ralph Orlowski//File Photo

FRANKFURT (Reuters) – European Central Bank policymakers still see the recent inflation surge as temporary but a growing number appear to be acknowledging the risk that price growth may exceed their relatively benign projections.

The ECB sees a sharp drop in inflation that will keep price growth below 2% over the next few years. However, the inflation rate was 3%, which is well above its 2% target. It could also rise to 3.5% by November.

A rise in commodity prices and signs of growing labour shortages could jeopardize this “hump” profile of consumer price growth.

Luis de Guindos (ECB Vice President) maintained his main scenario, but highlighted the upside risks. He also warned that the bank should be aware of the danger that short-term price rises may become permanent.

“Some European countries index their pensions and salaries to inflation,” de Guindos stated at an online conference.

It is best to avoid this because it can lead to a permanent upward inflation if there is a clear indexation in the economy to the effects of temporary shocks. That is why we must avoid it.

He warned of the dangers that production and commodity price bottlenecks could lead to a “second round” inflation.

Yannis Saintournaras from the Greek central banking chief acknowledged that the actual rate of price growth might be higher than the ECB projected, but argued this shouldn’t force the ECB towards tighter policy.

Stournaras spoke to Politico about the upside risks of inflation. “In the past, however, we have over-predicted inflation [on the higher side], expecting that it moves towards 2% in the medium term.”

For most of the last decade, the ECB missed its targets. Policymakers argue now that the bank should not be quick to move and should accept a small overshoot in order not to tighten policies too soon.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. CFDs include futures, stocks, indexes and Forex. Prices are provided not by the exchanges. They are provided by market makers. Therefore, prices can be inaccurate and differ from actual market prices. These prices should not be used for trading. Fusion Media does not accept any liability for trade losses caused by the data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. You should be aware of all the potential risks and expenses associated with trading in the financial market. It is among the most dangerous investment types.