FRANKFURT, (Reuters) – Inflation in the Euro zone could surpass expectations in the near and medium-term, and this outlook of price growth warrants an halt to the European Central Bank’s emergency bond buying next March, Klaas Knot, chief Dutch central bank, said Thursday.
The rise in inflation this year is due to a variety of unique developments. However, a number of experts, including the International Monetary Fund recently warned that prices may be more persistent than previously thought.
Knot spoke in support of the statement, “The headline inflation risks are now tilted again to the upside.” In the medium-term, upside risks are linked to persistent supply bottlenecks, and stronger wage-price dynamics in domestic.
Knot, a hawk sitting on the ECB’s Governing Council argued that even if upside risks fail to materialize, the bank’s baseline projections alone justify an end of the 1.85 trillion Pandemic Emergency Purchase Programme.
“The ECB’s current baseline scenario is consistent with ending the PEPP in March 2022,” he said. While we’re currently considering alternatives to the PEPP transition, new data should help clarify the implications of our current inflation baseline.
Knot seemed to be more relaxed regarding the long-term inflation outlook and played down market concerns that prices might spiral out of control.
He argued the inflation outlook was now on track and that market-based inflation expectations had put price growth in line with the ECB’s 2% target.
Knot stated, “These developments are very welcome.” This is great news, especially after a long period of setbacks.
Despite extraordinary stimulus including asset buys and subsidised loans for banks, the ECB failed to hit its inflation target in most of the past decade.
According to the bank, inflation will rise towards 4% by the end of this year and then fall back below target in 2022.
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