By Francesco Canepa

FRANKFURT, (Reuters) – The European Central Bank believes it is more likely to reach its goal of stabilizing inflation in the euro area at 2%. However, Martins Kazaks, ECB policymaker told Reuters that proof must be provided before the bank takes away any additional stimulus.

On Thursday, the ECB made another modest step towards reducing crisis-era bonds purchases but also promised to keep borrowing costs down next year as it sees inflation lagging behind its target for the two following years.

Kazaks (the Latvian central bank governor) said that inflation is heading toward the ECB goal due to a strong rebound economic growth following the pandemic but still required a boost in wages if it was to stabilize there.

“The main conclusions from the forecasts is that growth is still quite dynamic and that we’re moving towards our inflation target over the medium term of 2% but we’re not quite there yet,” he said in an in interview. “It’s increasingly likely that we meet the target.”

The euro-area’s record for inflation was 4.9% in October. On Thursday, the ECB stated that it expects it to rise to 3.2% next year. After which it will ease back to 1.8% the two following years.

These new projections led the ECB to decide to stop pandemic-related bonds purchases on Thursday. However, it effectively ruled out a rate rise before 2023. It also promised to maintain its bond stock from shrinking up to 2024.

It was very tense. Austrian, German, and Belgian conservative policymakers opposed what they considered excessive largesse, and stressed the danger of high inflation.

Additionally, several ECB governors warned Friday that inflation might rise above what they expect.

Although inflation was mostly within the ECB’s targets in the first decade after launch of the euro in 2002, it was plagued by disappointing price growth for almost ten consecutive years following the debt crisis in 2011-12.

Kazaks, which backed Thursday’s decision, said that the euro zone was now “getting closer to a turning moment” once again.

“It’s entirely normal that at a time when the ship is starting to turn there are differences of opinions,” he added.

LABOUR MARKET

Kazaks claimed that inflation will stabilize at 2% if the current hump is over, and that there was a strong chance for a positive loop to occur between wages and prices.

He stated that the labour market would be crucial for this and that the persistent inflation will feed into the expectation-forming system.

“The labor market has done quite well so we have a high chance that those mechanisms will kick in.”

He cautioned against jumping to this conclusion as many models used by the ECB still point to an inflation below 2%.

He said that the central bank should wait until new economic projections are available in March or June before changing its policy.

He stated that “currently we see that the greatest weight of forecast distribution remains below 2%.” “That’s why we will take decisions step by step and cautiously and when we revise our forecasts we will have more clarity on it.”