ECB’s Makhlouf: If Current Trends Persist, Case for Policy Action Becomes Stronger

23 November, 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Gabriel Makhlouf on Tuesday said that monetary policy should sit tight for the moment, but that a continuation of current inflation developments would strengthen the case to act.

At the Dublin Economics Workshop Annual Economic Policy Conference, Makhlouf, who heads the Central Bank of Ireland, said that policy tightening while the recovery is still ‘highly uncertain and incomplete … could prove more costly than the risks stemming from the current spike in inflation’ and ‘could slow economic growth unnecessarily, which could prevent inflation reaching our target in a sustainable manner.’

While agreeing that ‘the judgement that an immediate monetary policy response is not warranted – that patience is an important and worthwhile virtue – is reasonable and in the present circumstances correct’, he warned against complacency, given ‘risks to the inflation outlook.’

‘If current trends in inflation persist, the case for monetary policy action becomes stronger’, he said. ‘Incoming data do not currently show evidence that would lead us to think that inflation pressures are becoming persistent, but this could evolve and we must remain vigilant and cognisant of the risks.’

Monetary policy must be data-driven and ‘prepared to respond if the evidence starts to point to a need for this earlier than we had expected’, he said. ‘When the evidence changes, we should not hesitate to change our approach.’

‘And in the wake of the remarkable levels of uncertainty, we should also maintain optionality in our policy tools and not locking ourselves into commitments that put our price stability objective at risk’, he continued.

Forecasting was currently subject to ‘a remarkable level of additional uncertainty and complexity’, but ‘[o]ur judgement today is that we expect the global drivers of current inflation to recede gradually during 2022’, he said.

Wage-price spirals of the past are ‘a world we do not want to return to and I do not expect us to do so’, given a different institutional environment, he said. ‘In addition, higher inflation rates today should be viewed in the context of a prolonged period of too-low inflation in the euro area’, he said.

Makhlouf urged caution about comparing different jurisdictions’ inflation dynamics and monetary policy response. ‘Recent data for the euro area does not suggest, at least thus far, that higher inflation in 2021 is feeding into broad-based higher wage demands, although the upheaval in the labour market makes it more challenging than ever to extract timely and accurate insights from the data’, he said.

It is unclear whether manufacturing supply after the pandemic could contribute to more inflation, and how much influence climate-related shocks would have, he said.