Inflation has exceeded even the most pessimistic forecasts in recent months and the ECB nearly doubled its 2022 projection on Thursday, but continued to argue that longer-term price pressures are insufficient and price growth could dip back below its 2% target further out.
Expressing doubts about these projections, Bundesbank President Jens Weidmann warned that the ECB may be ignoring inflation risks coming from higher wages and the transition to a climate-neutral economy.
“The risks for the inflation rate are skewed to the upside, both in Germany and in the euro area as a whole,” said Weidmann, who will step down as head of the German central bank at the end of this month. “Monetary policymakers should not ignore these risks. We need to be vigilant.”
Weidmann, a long-time critic of easy ECB policy, said German inflation is expected to remain above the euro zone central bank’s target for years to come.
On Thursday, the ECB agreed to end an emergency stimulus scheme next March but topped up another bond buying programme and essentially ruled out a rate hike in 2022, ensuring rock bottom rates for months to come.
Backing Weidmann’s warnings, Lithuanian policymaker Gediminas Simkus also warned that inflation could end up exceeding the 1.8% the ECB is predicting for 2024.
“The risk balance is tilted towards higher inflation, due to Omicron, uncertainties, lasting supply side disruptions, higher energy prices, contagion into production prices. And this means that GDP growth risks are to the downside,” Simkus said.
Several ECB policymakers challenged the bank’s inflation narrative on Thursday, warning that current models may be inaccurate in such an extraordinary environment.
Taking a more benign view, Finnish policymaker Olli Rehn said it was not a given that price growth would be stuck at a higher level but did acknowledge risks.
“There is considerable uncertainty about the path which inflation will take and I’m well aware that rising inflation feeds through to our everyday lives,” Rehn, a moderately dovish member of the Governing Council, told a news conference.
“However the factors that have been driving inflation this year will not themselves lead to a longer term upsurge in inflation, unless they are accompanied by second round effects and a wage-price spiral.”
Source: Economy - investing.com
