They Said it - Recent Comments Made by ECB Governing Council Members

1 December 2021

By David Barwick – FRANKFURT (Econostream) – The following is a reasonably complete compendium of the most recent comments made by European Central Bank Governing Council members with respect to monetary policy:

de Cos (Banco de España):

(30 November) Monetary policy should take ‘a patient approach when assessing a possible revision of its current accommodative stance … Nonetheless, we should pay attention to the possibility of signs of a disanchoring of expectations, as this would be the main factor that would make this episode of high inflation persistent.’
‘[A] more unfavourable epidemiological evolution, with spikes in infections, cannot be excluded … it should be stressed that the degree of adaptation of economies to successive waves of the pandemic has increased significantly.’
(29 November) Higher inflation rates ‘are predominantly temporary in nature and, in the absence of further shocks, should start to subside over the course of the coming year’, though they have ‘proved to be stronger and more persistent than anticipated a few months ago.’
Past rises in intermediate good prices tend to show up with a delay in consumer prices and thus ‘could still contribute to an increase in inflationary pressures on final goods in the coming months’.
The output gap is projected to remain negative for the next couple of years, making it ‘hard to believe that inflation will remain high or even on target in the medium-term’, while medium-term fiscal consolidation would ‘have an adverse effect on economic growth and inflation’ that ‘is not completely factored into the current macroeconomic projections.’
‘[W]e are unlikely to witness interest rate hikes next year or even for some time thereafter,’ the conditions for tightening being ‘unlikely to be met within that time frame’.
Between the risks of deferring tightening for too long and tightening too soon, ‘it is better, in my view, to err on the side of caution when it comes to adjusting our monetary policy, and therefore to be patient’, as ‘premature tightening would probably prove costlier, since it could potentially trigger an even larger undershooting of inflation than envisaged at present’.
Keeping the PEPP’s flexibility ‘would be warranted, in the interest of our purchase programme’s efficiency and effectiveness and to provide for a sufficiently nimble response to any situation in which the smooth transmission of common monetary policy across all euro area countries might be compromised, as was the case at the start of this crisis.’

Vasle (Banka Slovenije):

(30 November) ‘Our baseline is that inflation will be below 2% at the end of our forecasting period. But the likelihood that it will stay above 2% is increasing. We're already witnessing some pressures here, higher wage demands in parts of the euro area. If these pressures will materialize, the decline of inflation will be smaller and not so fast as currently expected.’
‘Given the increasing likelihood that inflation won't decline as fast and as soon as currently expected, big caution is needed regarding our policy instruments. We must leave the door open if the situation evolves in either direction.’
Would be ‘supportive’ of a temporary post-PEPP increase in the APP to avoid market turbulence, but the outlook ‘doesn't call for additional, permanent increase of the APP.’

Weidmann (Bundesbank):

(30 November) National central banks ‘must be careful not to get caught in the wake of fiscal policy. And with sovereign debt high, monetary policy should be wary of any pressure to maintain its very loose stance for longer than the price outlook dictates.’
‘The broader central banks interpret their monetary policy mandate, the more likely they are to become entangled with politics. The more likely they are to be overburdened with ever new goals and desires. And the more likely their independence would be called into question.’
(24 November) Measures linked specifically to the pandemic ‘must be terminated as soon as the emergency situation has been overcome’, including the flexibility of the PEPP, which ‘should be reserved for extraordinary situations.’
Urged ‘not locking in the very loose stance of monetary policy for too long.’
‘[C]urrent price increases are significantly reducing purchasing power’.
Agreed that there were downside inflation risks in Germany and the euro area, but ‘the upside risks clearly outweigh the downside risks, recently even more so.’ There is ‘no evidence of a significant rise in broad-based wage pressures in Germany’, but ‘companies' complaints about labour shortages have increased considerably - especially in this country, but also among our European neighbours’, setting the stage for higher wage demands.
Short-term inflation expectations have ‘already risen considerably’ among not just German households and firms, but also experts and financial market participants. Experts’ long-term expectations are also up ‘slightly’.
‘All in all, however, it could well be that the inflation rate in the euro area will not fall below 2% again in the medium term. Therefore, monetary policy should not look one-sidedly at the risk of an inflation rate that is too low, but should also pay attention to the risk of an inflation rate that is stubbornly too high.’

de Guindos (ECB):

(30 November) The Omicron variant, the current German wave and the lockdowns elsewhere are ‘always unfortunate’, but part of a situation ‘different from that in 2020’.
It is ‘certain’ that the factors driving inflation are temporary and should fade in 2022, but ‘bottlenecks may last longer than expected. As a result, there’s a risk that inflation will not go down as quickly and as much as we predicted.’
That inflation expectations are ‘a little below’ 2% is ‘largely reassuring’. Though there have been no second-round effects via wages yet, the pandemic has deferred most wage negotiations to the end of this year and early next year, ‘So we should be very careful.’
At its December policy meeting, the ECB will adjust the PEPP ‘to the dynamics of inflation, to our economic forecasts and to the changing health situation.’
‘Despite the recent rise in infections, COVID-19 will eventually fade away. But we will not go ahead with tapering … as the US Federal Reserve has done. The President of the ECB has announced that net purchases will end in March. But they could be resumed if necessary.’
Monetary policy post-PEPP must remain accommodative, albeit not as much so as in the thick of the crisis, ‘because some of the scars left by the pandemic haven’t properly healed yet’, he said. The ECB must then ‘be even more driven by economic data.’
Net asset purchases ‘will continue throughout next year. Beyond that, I don’t know.’
‘[T]here is no urgency to decide on their [TLTROs’] renewal. We can wait a little longer; it’s not going to be a decision we discuss in December.’ Their continuation would address post-pandemic ‘scars that need to be taken into consideration.’ As repayment is not tied to one particular date, ‘there will not be a cliff effect.’
(29 November) The economy, though in ‘clear recovery’, has ‘lost a little momentum’ in 4Q, but ‘it’s going to be a good year’ in terms of growth. The euro area will ‘grow with intensity again next year.’
‘Short-term risks to the European financial system have fallen, they have fallen quite a lot as a consequence of the recovery. But on the other hand ... we find that the medium-term vulnerabilities of the European financial sector have increased’, among them ‘very elevated’ asset prices.

Schnabel (ECB):

(29 November) ‘We are operating on the assumption that the high point of inflation developments will be reached in November and that inflation will gradually subside in the coming year. Inasmuch, there are no indications that inflation is getting out of control.’
Supply constraints will ‘gradually resolve’.
To tighten policy now would be ‘a mistake’ that would not change anything about current inflation but would increase unemployment.

Lagarde (ECB):

(26 November) ‘We expect that the inflation rates will start to fall from as early as January. … The negotiated wage settlements have been very moderate so far. For next year, somewhat higher wage demands are partly to be expected. But based on what we are seeing, the settlements should not be on a scale that might trigger a wage-price spiral. … We don’t see any de-anchoring of inflation expectations. … These bottlenecks in, say, computer chips, containers and road haulage capacity are obviously persisting for longer than we had initially thought. But the situation will gradually improve next year in that respect too. … We expect that energy price developments will at least stabilise next year.’
‘If we were to tighten monetary policy now, we would expect it to have an impact in 18 months. … inflation would have fallen back again by then. We would cause unemployment and high adjustment costs and would nonetheless not have countered the current high level of inflation. I would find that wrong.’
‘Of course, we will act when necessary. When we see inflation reaching our two per cent target over the medium term, durably and sustainably – meaning not just for a short period of time – then the interest rates can rise again. Such an interest rate hike must serve our mandate of price stability, just like our entire monetary policy. When these conditions are met, no one will be happier than me to normalise monetary policy. Before we can raise rates, however, we will need to reduce our asset purchases.’
‘We need to ask ourselves which instruments work best to help us fulfil our mandate. We should keep all our tools ready, but we do not need to use all of them all the time.’
‘Under the current circumstances, I have no reason to doubt that we will stop net asset purchases under the PEPP in the spring. This does not mean that the PEPP will end completely – the maturing bonds need replacing and these reinvestments will need to continue. And let us not forget that we have other purchase programs in our toolbox. … the impact of the bond purchases is still positive and clearly outweighs the negative side-effects.’

Panetta (ECB):

(24 November) ‘[S]o long as higher short-run inflation does not feed into inflation expectations and wage and price-setting in a destabilising way, monetary policy should remain patient. We should not exacerbate the risk of supply shocks morphing into a demand shock and threatening the recovery by prematurely tightening monetary policy – or by passively tolerating an undesirable tightening in financing conditions. We should remain focused on completing the recovery, returning GDP to its pre-crisis trend, as the condition for achieving self-sustained inflation at our target in the medium term. To this end, we should keep using all of our instruments for as long as warranted, with the necessary flexibility to support the transmission of our policy stance throughout the euro area on its uncertain path out of the pandemic.’
‘The downside risks to economic activity may be growing. We should monitor the risk that a long-lasting negative supply shock prevents the economy from reaching full capacity. Globally, supply bottlenecks now appear to be slowing the recovery. That drag is affecting forward-looking indicators of activity in the euro area, which are plateauing and in some cases already pointing downwards. It may soon become visible in actual GDP growth. Supply-side disruptions and the uncertainty regarding the economic outlook also look to be weighing on the already unsatisfactory recovery in investment in major economies. In parallel, the rise in energy prices will likely pull back demand in the euro area: a 10% rise in oil prices typically reduces consumption by 0.28% over three years, and oil prices have risen by around 60% in 2021. Since energy demand has a low price elasticity, this could spill over into lower spending on non-essential services. In addition, rising energy prices may have important effects on firms’ employment decisions.’
‘[W]e should not forget that, regrettably, another major wave of infections is under way in the euro area, triggering renewed restrictions, some already introduced, with others potentially on the way. This could weigh on economic activity and, in particular, consumer confidence, further holding back wage demands.’
‘So, if the sources of higher inflation today do last longer, there is little or no evidence at this stage to suggest that they would feed into wage-price spirals or a de-anchoring of inflation expectations in the euro area. There are, instead, signs that they could weaken the recovery and reduce underlying inflation pressures. And we should not forget that in the last decade insufficient domestic demand growth in the euro area resulted in inflation that was persistently below our aim and in the accumulation of a price level gap that remains significant.’
‘All in all, on the basis of the available information, there seems to be little chance of sustained inflation above 2% in the medium term.’
‘[T]he surge in the number of infections and the renewed introduction of pandemic-related restrictions in some euro area countries mean that the pandemic is not over yet. … an inappropriate, sharp reduction of purchases would be tantamount to a tightening of the policy stance. Net asset purchases … need to be calibrated to help ensure we reach our target, avoiding an undesirable, premature increase in long-term interest rates. … so that we can continue to transmit our policy impulses across the entire euro area, the flexibility that has served us well in past months should become an integral element of our asset purchases. This will enable us to act – if necessary – in an environment where the exit from the pandemic may have asymmetric effects. We should not tolerate any financial fragmentation which could impede the transmission of monetary policy throughout the euro area.’

Makhlouf (Central Bank of Ireland):

(23 November) 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.’
‘[T]he 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’, but there are also ‘risks to the inflation outlook.’
‘If current trends in inflation persist, the case for monetary policy action becomes stronger. 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. 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.’
Forecasts are 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.’
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 … In addition, higher inflation rates today should be viewed in the context of a prolonged period of too-low inflation in the euro area. … 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.’

Villeroy (Banque de France):

(22 November) ‘Flexibility is at least as important as volumes’. An increase in the APP is ‘at the present moment a possibility, but not yet a necessity.’
Monetary authorities ‘have to be patient and vigilant at the same time … ‘We mustn’t overreact and tighten monetary policy prematurely.’ However, ‘if the situation changes, we should not hesitate to act.’
About the ‘general orientation of our monetary policy’ there is ‘a broad consensus in the ECB Governing Council. First: we have to exit our tried and tested crisis instruments’, including the PEPP and the TLTROs. ‘After that, in a second step we will start gradually adapting our monetary policy accommodation.’