ECB’s Müller: Inflation Risks on the Upside, Shouldn’t Make Overly Long Commitments

7 December 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Madis Müller on Tuesday said that euro area inflation risks were on the upside and that under current uncertainty monetary authorities should not make commitments that go too far.

In an interview with Reuters, Müller, who heads the Estonian central bank, said, ‘The main issue for me is that overall uncertainty about the ranges of possible future developments has increased, as has the risk of second-round effects.’

That inflation risks were now on the upside was ‘a fair assessment’, he said, noting the persistence of high energy prices and the potential of the Omicron variant of the coronavirus to prolong supply constraints.

Omicron ‘could also reduce price pressures by lowering demand’, he conceded, but ‘once we pass the hump, we’ll have more upward pressure on energy prices, also coming from climate policies. And we have also not yet included the cost of owner-occupied housing. Keeping all of these in mind, the risks are higher in general and they are tilted to the upside.’

Although inflation would subside somewhat in any case as base effects drop out and bottlenecks eventually ease, he said, ‘[t]hen the question is: how long will it take to decline and at what levels will inflation stabilize?’

Müller said he ‘wouldn’t be surprised’ if updated Eurosystem staff projections due out next week showed inflation above 2% in 2022. ‘When it comes to the longer-term projections, I think the outcome will be higher than indicated in the September projections’, he added. ‘But there’s a lot of uncertainty in terms of possible ranges and risks are to the upside.’

Significant second-round effects hadn’t yet been seen, he said, but he cited anecdotal evidence of companies’ need to hike pay to attract new employees as well as survey data underscoring labour shortages, and observed that ‘labour markets are usually a lagging indicator, so it would take time for wage pressure to build.’

In general, economic actors have learned to adapt to new health measures and variants, so that Omicron might be expected ‘to dent fourth quarter activity’, with demand ‘shifted by a quarter or two’, he said. ‘But in terms of the medium-term outlook, we still shouldn’t be too far from what we expected in September.’

As for decisions to be taken at next week’s Governing Council meeting, ‘we should not make commitments that go too far’, he said. ‘In light of the uncertainty, it’s wise not to commit to a specific policy for too long a period and we should keep our options open.’

Still, ‘we need to give some guidance in December’, he continued. ‘So, we could say that PEPP [pandemic emergency purchase programme] can go to zero in terms of net purchases by March 31. But beyond that, it’s not obvious to me that we should – in addition to what we have already communicated in terms of continuing purchases under APP – commit to adding further stimulus on top of what we have already.’

In particular, he said, ‘it would be wise not to commit to specific level of purchases for more than a few quarters ahead.’

Müller was sceptical about transferring the PEPP’s flexibility to the asset purchase programme, arguing that the pandemic-related emergency had justified the original decision, but that ‘existing court rulings put a limit on the flexibility we can use outside acute stress situations, while deviating much from the agreed parameters for the asset purchase program might also undermine our credibility.’

‘There are limits also’ with respect to increasing the flexibility of the capital key, he said.

However, ‘[g]iven the large issuance volumes that we expect in the Next Generation EU Programme, it makes sense to increase the share of supranationals at the expense of sovereigns, somewhat, at least’, he said.