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

10 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:

Schnabel (ECB):

(8 December) ‘new risks to financial stability have appeared on the horizon. … Today, rising vulnerabilities in residential real estate markets warrant a timely increase in system-wide resilience. Broad-based house price rises across both urban and rural areas, as well as growing signs of overvaluation, are rendering residential real estate markets in parts of the euro area increasingly prone to correction. However, despite stretched valuations, lending for house purchases continues unabated. In some countries, there is also evidence of a progressive deterioration in lending standards, as seen in the increasing share of loans with high loan-to-value and loan-to-income ratios.’
‘During economic upswings … central banks must recognise that the actions they take to deliver on their price stability mandate have the potential to contribute to a build-up of risks to financial stability. These risks have arguably increased in the vicinity of the zero lower bound.’
‘… should inflation expectations become unanchored in response to a persistent period of inflation above our target, even if due to adverse supply-side shocks, this would call for a shortening of [our medium-term] horizon. In this case, monetary policy must not be held hostage by fiscal or financial dominance – that is, even if financial markets have become more sensitive to changes in policy, central banks need to find ways to secure price stability without jeopardising financial stability. Reversing the communicated order of instrument sequencing is not an appropriate policy response in such circumstances. Maintaining a high volume of asset purchases merely to avoid adjustments in long-term yields in spite of imminent risks to price stability would give way to fiscal and financial dominance. That said, given its current architecture, the euro area remains vulnerable to fragmentation, meaning there is a risk that unexpected policy adjustments may be amplified in parts of the euro area, leading to changes in financing conditions that are sharper than intended. A credible backstop that commits to counter such risks of fragmentation may help protect against disorderly movements and thereby allow the central bank to focus on its price stability mandate. The PEPP has effectively provided such a backstop function over the course of the pandemic.’
‘… provided the instruments are similarly effective, policymakers should prioritise the use of those that have the least adverse impact on financial stability. Asset purchases, for example, are an important tool for stabilising the economy at times of market turmoil or when the economy is at risk of falling into a deep recession, jeopardising price stability. But their cost-benefit ratio deteriorates as the economy gains ground…’
‘… by gradually shifting the policy mix away from net asset purchases when the monetary policy objectives are within reach, central banks can mitigate financial stability risks effectively.’
‘Two measures are contributing to offsetting some of the pressure that negative or very low rates imply for banks’ profitability and hence for the bank-based transmission of our monetary policy. One is the introduction of the two-tier system under which part of banks’ excess reserves are exempted from negative rates. The other is the favourable rate at which banks can finance themselves through our TLTROs. Internal ECB analysis shows that, together, both measures broadly offset the costs banks incur when holding excess liquidity in a negative interest rate environment. And both of these tools can be adapted and recalibrated should we see risks to the bank lending channel emerging.’
(29 November) ‘Many people were not expecting prices to increase to this extent. But we believe that the inflation rate will peak in November and gradually subside next year, towards our inflation target of 2%. Indeed, most forecasts expect inflation to fall even below that 2% level. So there is no indication that inflation is getting out of control.’
‘You have to realise that the supply bottlenecks will gradually ease. Energy prices, too, will not keep increasing as rapidly and the one-off statistical effects will progressively drop out of the calculations. That means that inflation developments will not continue at the same pace. You also have to remember that the ECB is committed to the objective of price stability. So if we see that inflation could persistently remain at a level above 2%, we will of course respond decisively. At present, however, we are not yet seeing such indications.’
‘We have the toolkit to tighten monetary policy, of course. But at the moment it would be a mistake to raise interest rates prematurely and thus put a brake on the recovery. That would essentially result in higher unemployment and would not have any impact on the current extremely high rate of inflation.’

Kazāks (Latvijas Banka):

(8 December) ‘At the current moment, we don’t know how the Omicron variant will develop. Unless it spills over into significant and large negative revisions to the outlook for growth, I don’t see that March -- which the market has been expecting for some time and which we’ve been communicating in the past -- should be changed. If in February we see that it’s painful then of course we can change our views and that’s the issue of flexibility. In my view, it’s possible both to restart PEPP or increase the envelope if it turns out to be necessary.’
‘To exactly what level will [inflation] land in 2023-24, of course, there’s lots of uncertainty … my baseline remains that it slides to below 2%.’
‘At the moment we simply know too little about omicron [to make commitments]. I see it important to remain data-driven and make our decisions step by step. So react to the data, rather than preempt decisions when uncertainty is way too high.’

Holzmann (Austrian National Bank):

(7 December) ‘I don't think there will have to be major adjustments [to growth forecasts]. In many countries, the third quarter went better than expected. Now we have more uncertainty because of the new corona variant called Omicron. In the next two to three weeks we may know more about what it means from a medical point of view. But I remain optimistic that we will only see a dent in the economic recovery and not a broad slowdown.’
‘I think it is very unlikely that we will reach a value [for inflation] of less than 2% in 2022 as a whole. However, inflation is likely to peak at the turn of the year, because some base effects due to very low values from the previous year will then expire. In addition, it is foreseeable that energy prices will no longer rise as strongly as before. On the other hand, supply bottlenecks will continue to play a major role, for example in the food sector.’
‘The wage settlements do not tell the whole truth. In some countries, parts of the labour market are extremely tight, also because not enough workers are coming back after the pandemic. This applies to the service sector, but also to the health and IT sectors. The problem is that we last had such effects in the 1970s and 1980s. That's why our economic models are not set up for it. At the moment we don't know how fast inflation will fall. We won't see how much inflation will fall until March or June of next year.’

‘It's like when you are driving a car and a wall of fog comes: In that case, you brake and drive on sight. That is also recommended for monetary policy. We should not commit ourselves for too long and react to the data as they come.’
‘Depending on how the situation looks in the spring, [the ECB] could retain some flexibility. It would be possible, for example, to keep PEPP in the cupboard, so to speak, reserving the right to reactivate it. The other option would be to keep flexibility in the replacement purchases under PEPP. If the net purchases under PEPP are stopped in the spring, then according to current planning, the stock of bonds is to be kept constant until the end of 2023 and only then reduced. This means that for a long time to come, maturing papers under PEPP will have to be replaced by new purchases, and there could still be flexibility there. But we would have to check whether this is technically and legally possible. Often it is enough to have credible flexibility available. You don't necessarily have to use it, as has already been shown with PEPP.’
‘I would take a critical view of [making the APP more flexible]. APP was already created before the pandemic under completely different conditions. Moreover, the APP has been very closely scrutinised and blessed by the European Court of Justice (ECJ). Allowing new deviations from the existing rules could lead to a new review.’
‘I made the statement [that the APP could be reduced to net zero purchases as early as next September] before the new Corona variant became known. Today I would say we have to wait and see with the final decision. But apart from that, I have always been against linking the bond-buying programme and the interest rate hike too closely. I have long been in favour of separating the two more. ... interest rates could already be raised while the net purchases are still underway. If I'm not mistaken, the Swedes did something like that in early 2020 and, contrary to what some fear, it didn't disturb the capital markets. The previous forward guidance dates from the time when deflation rather than inflation was imminent. They did not want to spend too much money on bond purchases and therefore promised low interest rates for a long time. With higher inflation, things look different. In certain situations, it could make sense to raise interest rates, but to continue to provide liquidity to the markets through bond purchases.’

Müller (Eesti Pank):

(7 December) ‘Recent inflation numbers have been higher than expected, supply chain problems are now seen lasting longer than we thought just a few quarters ago and energy prices have remained high. These all impact my views. We still can certainly say that much of the high inflation we are seeing today is driven by temporary factors. But there is a risk that the longer inflation stays at such levels, the higher will also be the probability of second round effects. 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.’
‘Yes, I think that’s a fair assessment’ that inflation risks are skewed to the upside.
‘The main question is how much we’ll see in wage pressures. We haven’t seen a lot of hard evidence yet of rapid wage growth. But we do know that labour markets are relatively tight in several euro area countries. There is anecdotal evidence that companies are increasingly having problems with filling open positions, leading to increased pay for new hires. But survey data also shows an increased share of companies reporting that labour shortage is a constraint on future growth. We also know that labour markets are usually a lagging indicator so it would take time for wage pressure to build.’
‘It is likely that next year it will take longer for inflation to come down than expected a few months ago. It’s most likely that near-term forecasts will be raised, and I wouldn’t be surprised if we’re above target next year. When it comes to the longer-term projections, I think the outcome will be higher than indicated in the September projections. But there’s a lot of uncertainty in terms of possible ranges and risks are to the upside.’
‘We don’t know much yet about the new variant and its health impact. What we have seen so far is that the economy and businesses have adapted surprisingly well to restrictions on economic activity and also to new strains of the virus. Subsequent waves of the pandemic are having an increasingly smaller impact on the economy. But lockdowns will obviously have an impact on supply chains, too, and will postpone demand. So, there is added uncertainty. I would expect the supply chain issues and the restrictions to dent fourth quarter activity. But in terms of the medium-term outlook, we still shouldn’t be too far from what we expected in September.’
‘…we should not make commitments that go too far. 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. But of course, we need to give some guidance in December. So, we could say that PEPP 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 terms of flexibility, like how long APP should continue exactly, there we should keep our options open. … Given the uncertainty surrounding the near term outlook, I think it would be wise not to commit to specific level of purchases for more than a few quarters ahead.’
‘The flexibility in PEPP was justified by the very specific emergency. Already the 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 in’ capital key flexibility.
‘Given 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.’

Lagarde (ECB):

(7 December) ‘I think that the year 2021 will not be affected by the measures that we are starting to see here and there’ in response to Omicron, but the variant ‘is obviously a risk weighing on the conditions of next year's recovery.’
However, authorities now know how to react, medical solutions exist and ‘we are better equipped to respond to the risk of a fifth wave or the Omicron variant.’
Reiterated that ‘the inflation that we see today is mainly due to temporary phenomena’ and that supply constraints ‘will also fade, because demand and supply will readjust.’
(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.’

Scicluna (Central Bank of Malta):

(3 December) ‘In the international financial markets there is no consensus whether the current inflation is transitory and that it will retreat to levels below Central Bank inflation objectives over the medium term or not. In any case, at the ECB, it is fair to say that the jury is still out. Within a fortnight at the Governing Council we should have a clearer picture of the outlook and the appropriate monetary policy decision is then taken.’

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.

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.’