ECB’s Makhlouf: ‘Lot of Evidence to Suggest’ HICP to Subside, But May Not Happen That Way
17 September 2021
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Gabriel Makhlouf on Friday expressed confidence that inflation would subside again, but at the same time acknowledged that future price developments could surprise on the upside.
At the Dublin Economics Workshop Annual Economic Policy Conference, Makhlouf, who heads the Central Bank of Ireland, said that euro area economic performance had ‘improved strongly’, citing high confidence levels. Elevated inflation reading were ‘largely from temporary factors’, he said; these ‘are expected to dissipate in 2022 and inflation is likely to weaken again to levels below 2% over the medium-term.’
There is ‘a lot of evidence to suggest that this is the case’, he said, calling fears of excessive inflation ‘overstated’.
However, he added, ‘there is considerable uncertainty about the persistence of price pressures and we need to interpret this data and the outputs of our models with caution.’ Makhlouf appeared to hint that these pressures could be sustained, affirming that ‘[t]he pandemic is bringing about structural changes in our economy, which may only become more evident over time.’
Quoting a speech earlier this week by Executive Board member Isabel Schnabel, Makhlouf spoke of ‘growing indications that the current supply disruptions and commodity shortages could be prolonged…. The longer the supply chain problems persist, the greater the likelihood that firms will pass through their cost increases into consumer prices.’
‘So we need to be humble and recognise the uncertainty reflected in the slack and bottleneck conundrum and vigilant to the risks’, he said. Authorities must be ready to ‘react as necessary if conditions change’.
For now, he said, monetary policy needs to remain accommodative so as to support the recovery. An interest rate hike would hurt rather than help, he said.
‘With the correct monetary and fiscal policies in place, a sufficiently strong demand-driven recovery should see inflation return to 2% over the medium-term, in line with our inflation target’, he said. If the recovery is faster than expected, that is good from the point of view of inflation expectations, he said.