EXCLUSIVE: ECB Scicluna: Could Be Possible That We Achieve Price Stability by 2025

6 October 2021

By David Barwick – VALLETTA (Econostream) – The achievement of price stability in the euro area by 2025 cannot be ruled out, with economic agents’ reactions to higher inflation the key to future developments, European Central Bank Governing Council member Edward Scicluna said Friday.

In an interview with Econostream (transcript here), Scicluna, who has been governor of the Central Bank of Malta since the beginning of the year, said he would view with some sympathy a desire by Greece to see its debt included in the ECB’s asset purchase programme (APP) once the pandemic emergency purchase programme (PEPP) expired, but he stressed the need to look at the technical implications of inclusion.

Households may be more concerned by the current consumer price spike than central bankers on either side of the Atlantic, he suggested. Indeed, stronger price pressures are ‘something we’ve been looking forward to’, he said. ‘We want inflation to be anchored around 2%, give or take. So, it could be possible, yes, of course, that we achieve price stability by 2025.’

Scicluna defended the validity of the ECB’s projections, which currently extend to 2023, against the suggestion that policy preferences influenced the outcome of the forecast exercise.

‘In my nine months of experience, governors don’t push or pull as far as the projection figures are concerned’, he said. ‘We might show surprise at individual outcomes and be critical in a constructive manner – “Have you taken that into consideration?” and that sort of thing. But I would be surprised if anyone was intentionally underestimating or doing anything not to get the most accurate forecast.’

In the case of 2023 HICP, revised up a mere 0.1 point to 1.5% last month – observers had generally anticipated 1.6% if not higher – the ECB credibly accounted for the relatively small upward revision, he said.

‘Well, the staff convinced us that this outcome was temporary due to food, energy, supply bottlenecks and so on not being a permanent source of price pressures’, he said. The factors exerting upward price pressures ‘will not continue, unless – and this is what we discussed on the Council – they affect inflation expectations in a permanent manner.’

This was an open question, he indicated, given the pandemic’s uniquely ‘devastating effect’ on economic agents. For example, unions ‘at least initially are quite cautious’ in the face of higher inflation, he noted, but it is not known if that would remain the case.

Similarly, salary earners might eventually ‘give their employers a nudge and say, “I can’t cope anymore at my current salary”’, he said, while for companies, the question was ‘will they absorb the losses for a while longer rather than raise prices?’

The reaction to elevated inflation was ‘what matters now … and I am all ears and eyes to see whether economic actors are going to contribute to inflation or not’, he said. ‘This is crucial for whether the current increase in inflation will be a short blip, a longer blip or a permanent development.’

Turning to the issue of whether Greek debt, currently eligible for purchase under the PEPP, would be included in the APP in a post-PEPP world, Scicluna said there would ‘definitely be mixed views’ on the subject, but argued that the experience under the waiver of the PEPP should colour the discussion.

‘I’m not pointing to any particular outcome, but it’s not the same as asking for a waiver without having had the experience of the emergency’, he said.

Asked whether he personally would view Greece’s desire to include Greek debt in the APP with some sympathy, he said, ‘Yes, I would, you can’t ignore our recent experience. But I would want as well to listen to whoever has a technical explanation of the negative implications, if any, and of the risks the decision might involve.’

In general, the ECB needed to avoid cliff effects associated with the reduction of policy support, he said. The Governing Council didn’t yet announce a programme of tapering simply because it hadn’t yet been ready to make such a commitment, he said.

‘We’ll do that in December’, he said. ‘And that’s the interpretation to be given to our preference for calibration rather than tapering. When we announced it, we hadn’t yet seen the necessity of a programme of tapering, with a clear beginning and end, without hesitating or reversing course. In December we’ll be very explicit based on updated projections.’

While unable to rule out events that would lead to a delay, Scicluna strongly advocated not deferring such decisions beyond December. ‘The onus is on us to give it all our energy to decide at that point, and my feeling is that in December we’ll consider the updated outlook and announce something significant’, he said. ‘We owe financial markets some form of meaningful and significant statement at that point.’

The APP would be included in this, he made clear. The question of how much if any of the PEPP’s flexibility could be transferred to the APP was ‘not so easy to answer’, he said. ‘Certain countries would mount legal opposition to a flexible APP. The PEPP’s emergency flexibility was allowed because it was a pandemic; I wouldn’t think that it would be an easy thing to agree on in a non-emergency.’

With the major decisions apparently not to come until December, the October meeting of the Governing Council would be an opportunity for governors to express ‘increased concern about inflation’, he said. ‘We’re always updating ourselves and our understanding.’

As for when the crisis phase would be over, Scicluna described the outlook as ‘a mixed bag’, given the large differences in vaccination progress across countries and even within Europe. ‘In a global world where we want globalisation to continue where it left off, so to speak, you’re not yet there’, he said.

‘For world trade to succeed and normalise, we need all countries to normalise, and we’re not there yet’, he observed. ‘The risks are there, the uncertainty is there. Is it a matter of months or years? It adds to the uncertainty, and that is what’s keeping alive, again, this question of tapering.’

Ideally, tapering would be possible, ‘but at the same time, one hesitates and wants to give oneself the benefit of being able to stop and maybe rethink’, he said. ‘So it’s not clear. There are always these issues niggling and creating uncertainty.’

Still, the pandemic is ‘more under control than it was, definitely’, he said. ‘We’ve made big strides. Everybody’s still cautious, but you can tell that gradually, it is moving towards normalisation.’

Scicluna described himself overall as ‘cautiously optimistic.’