ECB’s Šimkus: Inflation Unlikely to Rise to Worrisome Levels; Sustained Surge Unlikely
4 June 2021
By David Barwick – FRANKFURT (Econostream) – A prolonged increase of inflation is am improbable scenario and policymakers need to avoid reacting to developments hastily and potentially threatening the recovery, European Central Bank Governing Council member Gediminas Šimkus said Friday.
In a speech on the occasion of the 30th anniversary of the National Bank of Moldova, Šimkus observed that the US economy would grow above potential this year and ‘very likely’ return to pre-pandemic levels by next year.
‘There is little chance of that happening in the euro area in the foreseeable future’, he said.
European job market trends are diminishing the bargaining power of labour, which ‘makes it increasingly difficult to build wage pressures that could raise inflation’, he said. ‘The evidence we have on the table, then, indicates that a sustained surge of inflation is an unlikely event – be it in the US, Europe or elsewhere.’
‘For the same reason that inflation did not drop significantly when output gaps were large and negative during the global financial crisis, inflation is unlikely to increase to worrisome levels now’, he continued. ‘Of course, centrals banks need to stay vigilant and closely monitor inflation developments, so that sudden reactionary policy does not put the brakes on economic recovery.’
An inflationary surge in the US would mean monetary policy could not be tightened in unison throughout advanced economies, he said. ‘Managing such desynchronisation may prove to be challenging’, he said.
The higher degree of coordination between monetary and fiscal policy in the US helps explain higher US inflation, he said. ‘Accordingly, the key risk in the post-pandemic period is that poor coordination between monetary and fiscal policy leads to a continued and pronounced undershooting of the inflation objective’, he said.
Turning the the ECB’s strategy review, Šimkus called a more clearly symmetrical inflation target ‘vital given the new realities.’
‘However, that step might not suffice to convince markets and agents in the real economy that we are serious about reaching the inflation target’, he said. ‘Allowing for a period of above-target inflation to compensate for a sustained undershoot might be an additional tool to increase inflation expectations.’