FRANKFURT, (Reuters) – The following text is a Reuters interview by Madis Müller, European Central Bank policymaker and Estonian Central Bank Governor.

Q: Since the last policy review, how has your opinion on inflation changed?

Q: Inflation numbers recently have been much higher than anticipated, supply chain issues are seen to last longer than previously thought and prices for energy have not fallen. They all have an impact on how I think.

It is possible to say with certainty that much of today’s high inflation was caused by temporary causes. There is still a chance that second-round effects will occur if inflation remains at these levels for a longer time.

For me, the main problem is increased uncertainty over the possible outcomes of future developments and risk of second round effects.

Q: Would you agree to those who say that inflation risk is tilted towards the upside?

A: I believe that is a fair assessment. Now that energy prices have remained high longer, and the virus is newer, it could be that bottlenecks in supply chain may last longer. It could reduce demand, which would also help to lower price pressures. Omicron adds uncertainty to the equation.

However, if we look at the long-term, it is likely that once we have passed the hump we will see more upward pressure on energy prices. This could also be due to climate policies. We have not included cost of homeowner-occupied housing. Keep in mind that there are greater risks and the potential upside to all these.

Q: Is there a second round of risks that you can see?

A: It is not clear how high wage inflation will be. There isn’t much evidence of wage growth at this time. However, we know from experience that many euro-area countries have tight labour markets. It is evident that new hires are being paid more because of the difficulty in filling available positions. However, survey data shows that more companies report that the labour market is hindering future growth. It is also known that labour markets are a slow indicator, so it will take time for wage pressures to build.

Q: If you say most of the high inflation is temporary, then you are also not ready to retire the word “transitory” to describe the current period of price growth?

A: Low levels of 5% may be temporary due to energy prices and the base effect. Over time, bottlenecks should be less. These levels will soon be temporary. Now the big question: How long does it take for inflation levels to fall and when will they stabilize?

Q: Do you believe it will return below the target projected by ECB?

A: Next year, it is more likely than anticipated that inflation will fall. Near-term forecasts are likely to be increased, and it wouldn’t surprise me if we exceed target next year. The longer-term projections will show a different outcome than the September projections. There is a lot uncertainty about the possible outcomes and risk factors.

Q: Is Omicron or lockdowns changing my growth outlook?

R: Unfortunately, we do not know anything about this new variant or its potential health effects. We have observed that businesses and the economy have fared well in the face of restrictions and new viruses. The subsequent waves of pandemics are having a decreasing impact on the economy. Lockdowns can have a significant impact on supply chain and postpone the demand. This creates additional uncertainty. Fourth quarter activity will be affected by supply chain problems and restrictions, as I expect. We shouldn’t expect to be far off September’s expectations in the medium-term outlook.

Q: Would you think that growth will be pushed into future quarters if the short term is less favorable? Is it lost growth?

A: There will be no shortage of demand, although it could shift by as much as 25% or more if supply chains are clogged up.

Q: Companies have provided evidence that the supply chain bottlenecks do not seem to be easing. What do you believe they will continue for?

A: It is now more likely that bottlenecks will become worse and take longer for them to be resolved than it was just a few quarters back. They could get worse. Perhaps with the latest variant of the virus. However, the bottlenecks should gradually decrease over time. It will likely last into next year, I am certain.

Q: Would you and your colleagues agree that the PEPP should be ended next March?

A: Yes. While we need some flexibility for decision-making moving forward, PEPP could end.

Q: What is flexibility?

A: We should avoid making too broad commitments. A: It’s a wise decision not to make a commitment to one policy for too much time due to uncertainty. We should also keep all options open. We must, however, give guidance for December. We could also say that PEPP’s net purchases can be zero by March 31. But beyond that, it’s not obvious to me that we should – in addition to what we have already communicated in terms of continuing purchases under APP – commit to adding further stimulus on top of what we have already.

It’s difficult to see why we need more stimulus given the current high level of inflation.

We should be flexible in terms of how long APP should last.

Q: So there is no end date to APP?

A: It’s not something I believe we need to communicate right now. It is important to remain flexible, and not limit our choices. We shouldn’t commit to long windows of purchase due to uncertainty.

Q: Would you say too long is a definition?

Q: I believe it is prudent not to make any commitments to purchase more than one quarter in advance, given the uncertain outlook.

Q: What percentage of the flexibility PEPP can transfer to the APP

A: I am concerned that there could be legal hurdles. Because of the emergency, PEPP allowed for flexibility. Existing court rulings already put limits on how flexible we can be outside of severe stress situations. Furthermore, deviations from the parameters agreed for asset purchase programs might compromise our credibility.

Q: Your capital key was already flexible. Is it possible to increase this?

Q: That is not all.

Q: Does an increase in supranational debt limits make sense?

A: Given the volume of issuances we are expecting in Next Generation EU Programme it is sensible to increase supranationals’ share at the expense or sovereigns.