ECB’s Elderson: To Look Through Higher Inflation Due to Transitory Factors

16 March 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will look through higher inflation due mainly to transitory factors, ECB Executive Board member Frank Elderson said on Tuesday.

In a Twitter interview, Elderson, asked whether the Eurozone was headed for deflation or inflation, said that after the sharp recent rise, inflation was ‘likely to go up further in the coming months.’

‘This is mainly due to transitory factors, which we look through’, he added. ‘Underlying inflation remains subdued owing to weak demand and economic slack.’

As to the next rate hike, the ECB’s forward guidance is clear, he said: ‘We expect interest rates to stay at their present level or lower until we see that inflation comes back to our objective of close to, but below, 2%.’

In determining the favourability of financing conditions, the ECB looks at ‘a number of indicators’ such as ‘their underlying drivers and how they develop over time, in combination with the inflation outlook’, he said.

So-called upstream indicators refer to ‘important benchmark rates that mark the starting point of our monetary policy transmission’, he explained, while downstream indicators include ‘the financing conditions that are more relevant for households and firms but are only affected by our policy with a delay.’

The increase decided last week in the pace of purchases under the pandemic emergency purchase programme (PEPP) does not compromise the PEPP’s flexibility, but rather ‘is precisely a reflection of the flexibility embedded in the PEPP’, he said. ‘We have increased purchases to prevent a tightening of financing conditions that would risk the return of inflation to pre-pandemic levels.’

The ECB uses ‘as much powder as needed to preserve favourable financing conditions’, he said. ‘Based on an assessment of financing conditions and the inflation outlook, we expect PEPP purchases over the next quarter to be done at a significantly higher pace than before.’

Elderson affirmed that the ECB was aware of ‘possible side effects’ related to its policies, citing the tiering system as an example of how it tries to limit unintended consequences.

‘Asset purchases can lead to higher asset prices but they’ve also helped to maintain millions of jobs’, he said. ‘We're closely monitoring side effects of our measures and analyses have shown consistently that positive effects have exceeded negative ones.’

The ECB does not see that its accommodative policy stance is creating zombie firms, he said. ‘The pandemic is deep but temporary, so the risk of zombification is less pronounced than in other downturns’, he said. ‘In general, the share of zombie companies in the euro area has declined since 2014.’

Although the environment for companies is very challenging, he said, markets are optimistic about the recovery and corporate earnings.