Balazs Koranyi

LJUBLJANA – Euro zone inflation may exceed projections. The European Central Bank must monitor the price rise and end its emergency stimulus program next March, Bostjan Vasilieff told Reuters.

Due to a variety of factors that are not considered one-off, inflation has risen above the ECB’s target. There is concern that what was initially seen as a temporary increase in price could be made more permanent by higher wages or corporate pricing.

Vasle, a member conservative of the ECB Governing Council said that there are signs in the early stages of the economic recovery and some areas where the risks regarding the labor markets could increase.

Vasle stated that “in some areas of the economy, labor is scarce” and that if this trend continues or spreads to other sectors it could lead to an inflation risk. We should be careful of second round effects, I believe.

Vasle stated that while there isn’t any hard data at this time, Vasle noted that businesses have provided evidence to suggest that the labour shortage is becoming more severe and workers are asking for higher wages.

In fear that the COVID-19 panic-induced recession could lead to a self-reinforcing spiral of deflation, the ECB provided unprecedented support last year for the eurozone economy.

Despite the fact that the output of 19 countries has almost recovered, the ECB still has not reduced support in a significant way, even though other central banks have started tightening policy or indicated imminent actions.

In December, the ECB must decide whether it will end its Pandemic Emergency Purchase Programme of 1.85 Trillion Euros. Vasle was part of a growing number policymakers who support its termination.

Vasle explained that “if these trends continue”, it would be appropriate for PEPP to be ended in March 2019, as stated when the programme was first implemented.

“We also need to stress that, even if we end the program, we will continue to offer plenty of liquidity through our other instruments.”

For the Q&A of this interview, click on

STILL A FAVOURABLE

Markets are pricing in an ECB interest-rate hike before next year because inflation is rising. It’s an aggressive stance which seems to be out of step with the ECB guidance.

Vasle minimized market-based rates expectations.

He said, “I believe we have made our intentions clear and which developments will impact our decisions.” This shift is not something I would place too much importance on at this time.”

He dismissed concern about a rise in yields on government bonds, arguing instead that the ECB has maintained that financing conditions are still favorable, whether they have been inflation adjusted or real.

Vasle was not going to discuss whether the ECB ought to top-up other instruments in order compensate for the loss of asset purchase volumes. However, he argued that the central banks cannot keep all of the flexibility contained within the emergency program.

Vasle said, “I am not against the discussion regarding additional flexibility for our existing instruments,” Vasle agreed. “But in normal times this type of extraordinary flexibility wouldn’t be justified,” Vasle said.

The ECB is currently allowed to purchase up to a third each of member countries’ debt. It must also buy widely in accordance with each economy. Rules that could be brought up at the Dec. 16 meeting may also be on the agenda. The next meeting of policymakers is scheduled for the same week. No changes to current policies are expected.

However, it seems easier to increase the proportion of supranational loans in the ECB’s portfolio.

Vasle indicated that “this would be a natural proposition and I expect it will be part of our discussions.”