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

20 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. The frequency of updates will correspond approximately to the frequency with which relevant comments are made.

Holzmann (Austrian National Bank):

(18 December) ‘What is assumed, however, is that after peaking at the end of 2021, inflation will decline steadily in 2022.’
‘As long as the projected inflation rate is below 2%, further monetary policy measures are needed. But, what we have done ... we have already made substantial restrictions in the purchase programmes in Thursday's decision.’
‘There will be interest on savings accounts again when inflation is at a level that is our target variable. Then it will be possible to raise interest rates here again.’
‘But I can assure you that if there are differences in the voting behaviour, there are not big gaps here, but rather nuances that play a role, for example in the assessment of where inflation lies at the end of the planning horizon.’
There are indications that there is a risk that inflation will be higher. But one will be able to check this assessment very, very quickly when one sees next year what the inflation realisation is. If there is not this sharp decline that is being talked about at the moment, then everyone, including other colleagues, will certainly also revise their views, and we will of course change our monetary policy orientation.’
‘Inflation, as it is forecast, will move towards 2%. Whether it comes below 2% in the final forecast, or above, will determine which measures of monetary policy are adjusted. All of us in the Governing Council are ready to put measures in place if inflation should increase, if the inflation forecast should increase, then existing measures that are still in place can be reduced, suspended, and then there will also be an increase in interest rates again.’
‘If things change, if there are higher inflation forecasts, then we will do what we promised when the purchase programmes expire. Only then will there be an interest rate hike.’
If inflation were to go to 3% beyond next year, that would ‘absolutely’ be a reason to act and raise the policy rate.
‘We are aware that this fiscal dominance is an issue that concerns us all. However, I cannot see this dominance from the decisions we have taken so far, also because there are enough people in the Council who are quite aware of the issue and would also correspondingly demand counteraction and would also articulate themselves accordingly.’
I think it was a very balanced decision overall [on Thursday], with comments in both directions.’
‘Our assessment, which is also reflected in the forecasts, is that we expect a weakening of the upswing, i.e. that the economic development will not be as good, but that despite everything the recovery will be very strong and that we will already reach the level of 2019 again at the beginning of 2022, and that the economic development will continue to be above 4% for the year.’

Wunsch (National Bank of Belgium)

(17 December) ‘There’s a lot of uncertainty about 2023 and 2024, but my take is that we’re essentially at target. Whether you’re at target or just a little bit below or a little bit above doesn’t matter so much. What I’m a bit concerned about is the fact that we’d insist so much on still being below target.’
On faster tapering, ‘that’s to me not the big issue. The big issue for me is the narrative that doesn’t recognize enough that there seems to be an inflation issue in the world and we seem to see it very differently.’
‘We used to have low inflation rates and we were expecting to converge to the target. But today is very different. Now we’re clearly above target. We have an average inflation over four years that’s clearly above 2%.’
‘If we don’t believe that we’re going to have any kind of second-round effects, if we don’t believe our monetary policy is effective, at some point, we’re going to have a problem. Because otherwise we’re in a situation where we’re never going to exit.’

Villeroy (Banque de France):

(17 December) ‘…we have taken clear, balanced and complete decisions. I think it was a good Governing Council. What is the situation regarding inflation? We have to be totally pragmatic, i.e. look at the data. We look a little at the forecasts, the models, the market expectations, but above all we look at the data and we listen to the business leaders. There is an undeniable inflation bump … it is higher than expected in 2021-2022, essentially because of energy prices and it lasts a little longer than expected. So a forecast of 3.2% on average in 2022. By the way, this average masks a rather different trend, i.e. inflation should fall gradually over the year.’
‘We are probably quite close to the peak of inflation, but we remain extremely vigilant. Again, we are guided by the data, not by beliefs, not by bets. But that is the perspective. After that, we are converging towards our inflation target of 2%, and that's good news.’
‘This inflation forecast of around 2% in 2023-2024 - by the way, this is the forecast of almost all international organisations and private forecasters - means something important that has perhaps not been stressed enough. It is that after the bump, which once again we take seriously, we are not returning to the pre-Covid regime, remember, of very low inflation. There is in some ways a new inflation regime around the 2% target. This is more similar in some respects to what we knew before the financial crisis, in the years 2000-2007. And I would add that we should perhaps not give undue importance today to a difference of 0.2% between the forecast of 1.8 and the target of 2. This is the margin of uncertainty at the forecast horizon of 2024. We will adjust our monetary policy in the future - we can do this at any time - according to the actual data that we observe. There is a very pragmatic and close steering, if I may use a navigation term, a close steering of monetary policy according to the actual situation. But this is the central scenario today.’
‘On wages, negotiations are ahead of us. All these are things that we are looking at very closely, with modesty. I think everybody has to be humble in this period of uncertainty, but there are two possible mistakes on monetary policy. The first would be to tighten too soon when most analysts believe that these difficulties are real but temporary. In the opposite direction, if inflation becomes persistent and lasts longer, the mistake would be not to react. By the way, we said yesterday that we would adapt at any time. There is a word that has been used a lot which is not very nice, it is the word "optionality". If we were in a more sustainable inflation scenario, which again is not our central scenario, then we would not hesitate to act and we have the means to act.’
‘What did we decide yesterday? There were some very important decisions. The first decision was to stop the two exceptional crisis programmes, as we had said, in due course. That is to say, the net purchases under the famous PEPP, the massive asset purchase programme, and then on the TLTRO, which is perhaps less well known - it is a bank refinancing programme with ultra-favourable conditions - we stopped these ultra-favourable conditions.’
‘We are tightening up a bit. In any case, we are reducing exceptional crisis support. Why is this? First of all, it's an element of credibility. We are doing what we said we would do. And secondly, it is an element of confidence in the solidity of the European recovery, despite Omicron and the fifth wave. Of course, we have to be careful. Here too we have to be pragmatic and listen to reality and to companies. But as we said yesterday, European growth will be above 5% this year - that's very high - and should be above 4% next year.’
‘Through this decision [on December 16] ... it means that we are very significantly reducing the amount of our net asset purchases. The figures have perhaps not been sufficiently highlighted or analysed by observers. But this year, in 2021 ... our net asset purchases each month are on average a little over 90 billion euros. At the end of next year, in October 2022, this 90 billion will be reduced to 20 billion per month. That means a division by 4.5. ... it's an extremely significant reduction ...’
‘Central banks are not there to cover the financing needs of governments.’

Rehn (Bank of Finland):

(17 December) ‘There is considerable uncertainty about the path which inflation will take, and I’m well aware that rising inflation feeds through to our everyday lives. The factors that have been driving inflation this year will not themselves lead to a longer term upsurge in inflation, unless they are accompanied by second-round effects and a wage-price spiral.’
‘Bringing the pandemic under control remains central both in terms of people’s health and for the economy.’

Müller (Eesti Pank):

(17 December) ‘The outlook as a whole is optimistic: the economy is recovering rapidly from the crisis, unemployment is falling to an all-time low and people's incomes are rising. At the same time, the sharp rise in prices in recent months has come as an unpleasant surprise to everyone, and it is also forcing euro area central bankers to adjust their plans. … Almost half of the rapid rise in prices is due to higher energy prices, but the prices of more and more other goods and services are also rising. It is clear that such a rapid rise in energy prices will not last long, which is why we are expected to be close to the moment when the general rise in prices will start to slow down again. It is also reasonable to assume that as the effects of the pandemic mitigate and companies adjust, supply problems will decrease, which has pushed up the prices of many goods.’
‘… the longer the price increase remains relatively fast, the more likely it is that it will be passed on to more and more goods and services. Therefore, the Governing Council of the European Central Bank cannot ignore the accelerated rise in prices, even if a slowdown is expected in the near future.’
‘The changed inflation outlook requires a change in the monetary policy stance. Understandably, however, this is being done with caution, as uncertainty about near-term economic developments remains high.’
‘For me, what is important is the change of tone in the messages of the Governing Council. The acceleration in price increases and the improvement in the economic situation will allow the central bank to reduce the injection of money into the economy and to clearly set a course of "normalisation" of central bank policy. This is already reflected in financial market expectations that the ECB could start raising interest rates in early 2023. In the Governing Council's decisions, we are no longer just concerned about a slowdown in economic growth and dangerously low price rises in the long run, but are also prepared to react to the possibility that the pace of price growth in the euro area may not slow back to 2% fast enough. In that case, we are also prepared to tighten monetary policy more rapidly than described above.’

Weidmann (Bundesbank):

(17 December) ‘The risks for the inflation rate are skewed to the upside, both in Germany and in the euro area as a whole. Monetary policymakers should not ignore these risks. We need to be vigilant.’
‘The [German economic] upswing has been slightly delayed.’
(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.’

Vasle (Banka Slovenije):

(17 December) ‘Inflation will remain elevated in the coming year and will converge towards the 2% target by the end of the forecast horizon.’
‘Risks to the economic outlook are high and evenly distributed, depending mainly on energy price developments and conditions in the supply chains.’
‘The reinvestment of the maturing principal of the PEPP securities has been extended by one year and will continue at least until the end of 2024, thus ensuring all the necessary flexibility of the programme to address the fragmentation in the euro area linked to the effects of the pandemic. We are also ready to resume net purchases after the PEPP ends in March 2022, should this be necessary to address negative shocks linked to the pandemic.’
‘We expect that the period of significantly more accommodative TLTRO III conditions will come to an end in June next year. We will also consider the appropriateness of calibrating the two-tier interest rate on surplus reserves.’
‘Our decisions were also based on new forecasts. Their key message is that the economic impact of the pandemic in the euro area is diminishing, so that we expect high economic growth and very favourable labour market conditions this year and next.’

Lagarde (ECB):

(16 December) ‘We did not want to have a transition that would be hurting, and we also need to continue this progress towards our target and arrive at target, which we are not at yet at this point, which is the reason why we decided to increase the volume of purchases under the APP, but to increase it with a decline over the course of quarter two, quarter three and quarter four. Now, we're not making any specific commitment, if you read carefully our statement. We land at €20 billion in October, and we keep it opened, and we will maintain it at €20 billion until such time when we arrive at our target, which is the 2% over the medium term.’
‘Given the uncertainty, we also wanted to have as much flexibility and as much optionalities available. Hence, the reason why on the account of PEPP we've decided to extend the reinvestment period at least by one year, and we've also, as I said in relation to PEPP, we've also decided to keep it open-ended. We are driven by data, and we will be reviewing next March, next June, next September, as we receive updated projections. We will reassess, and as it says very clearly in the statement as well, we will adjust in either direction depending on the data that we receive. But suffice at this point to indicate that, under the present circumstances, as I have said before, it is very unlikely that we will raise interest rates in the year 2022. That still stands. But we have to be very attentive to what data tells us, and we will do so at each and every monetary policy meeting, and even more so when we get regular projections that are either ECB only, or ECB and national central bank projections.’
‘…about the impact of omicron, again, we are venturing in the realm of uncertainty. It will have impact, but in the first place we should acknowledge that our economies have become more resilient, stronger, and are more capable of adjusting wave after wave after wave, and variant after variant. So we don't know yet a lot from the scientific world as to the actual hardship of this virus and how bad it is relative to delta, for instance. We are still waiting for this data and this information from those who know, but the economy is more resilient. So it might have a dampening impact on demand, because people will consume less; people will go around less; people will be under restrictions, but it might also have an impact on the supply side as well. The balance between the inflationary or deflationary impact that omicron will have is still totally uncertain, which is why, as I said, in view of this uncertainty, and with the strong recovery, we believe that it is the right place to gradually decline over the course of time, but keep flexibility and optionality in order to respond to change of circumstances.’
‘We had a very, very large majority to support the overall package. So there were a few members who did not agree with one or the other element of the package, and therefore did not support it all, but I can tell you that it was a very, very broad majority that supported the whole package.’
‘So in relation to our inflation projections for 2023 and 2024, which are at 1.8% respectively, a small 1.8%, and a slightly higher 1.8% for '24, we are really making progress towards target. Are we at target, given that our target is 2% over the medium-term, and looking at the three criteria of our forward guidance? Not quite. Is there an upside risk? There is possibly an upside risk, but I think that staff, in putting their projections together, have in particular anticipated some impact on wages. We are, as you know, looking very, very carefully into wages, into negotiations, to determine how much of a second-round effect there would be on inflation. When we look backward, when we look at what's happening just now, we don't see much of that, and the numbers are not telling us that we are seeing second-round effects and that wage negotiations have delivered or are about to deliver numbers that would actually lead to second-round effects. But in the projections that have been produced by staff, drawing on the NCBs, the national central bank projections as well, there is quite a high level of wages that has been taken into account. So yes, of course, there could be a stronger recovery. There could be stronger wages being delivered. This is really going to be a factor also of two things that we are uncertain about, as I have indicated. How will the price of energy evolve in the course of the next few quarters? Is it going to be as elevated, and more elevated – there has to be a dynamic – than what we have seen so far? It's probably going to stabilise, but there is a level of uncertainty about it, for certain. The same goes for the adjustment between supply and demand, but it is probably to be expected that consumption patterns will resume in more normal ways, and that there will not be that sort of catch-up demand that we have observed. In the same vein, it is reasonable to think that supply will adjust. So on those two accounts, energy is probably projected to stabilise; supply and demand will adjust, we believe, in the course of '22. And on the wage account, and how much of a second-round effect it would have, as I said, we are extremely attentive to what happens on a weekly basis, but what we are seeing now, certainly, is significantly below the levels that have been factored into the projections that we have. So we certainly hope that we reach our target in the medium-term, and the efforts that we are deploying are intended to that effect.’
‘…about PEPP. As I said, we want flexibility, we want optionality, and as part of the flexibility we say very clearly – and I'm going to read again that paragraph, which is important 'Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.' Pretty straightforward, but as always, it is going to be a decision by the Governing Council. So it's not something that will happen randomly, by the way; it will require a decision by the Governing Council on the recommendation of the Executive Board. We say 'net purchases', we don't say a particular amount, or emptying the balance of the envelope that we would have at the end of March. So it's clearly at the determination of the Governing Council, and depending on the circumstances.’
‘On TLTRO, as you know, it has provided ample liquidity at very attractive rates, and it has really been an incentive for banks to continue lending, and in the bank survey that we conduct on a regular basis, they are always indicating that TLTRO and TLTRO special conditions have been very effective in supporting the financing of the economies at enterprise and household levels. Clearly, as planned, and given the financing conditions that are available, we currently expect that the special conditions applicable under TLTRO IIIwill end in June 2022. This is really based on the currently favourable assessment of banks' funding and liquidity conditions, and the smooth banks-based transmission of our monetary policy. This does mean that the support transmitted through the TLTRO3 will end, because banks are going to continue to benefit from the attractive TLTRO III conditions. The first operation will only mature in September of '22, and the final one will mature in December '24. So banks are going to continue to benefit from those attractive conditions, unless they decide to elect for an early repayment, but otherwise, it will continue to be available. We will remain very attentive and we will monitor very carefully those favourable financing conditions going forward, in order to make sure that our monetary policy is transmitted properly throughout the banking system.’

Stournaras (Bank of Greece):

(10 December) ‘… progress in vaccinations is a major deterrent to the transmission of the pandemic and has contributed to the lifting of social distancing measures and the restart of the economy. However, we cannot yet say for sure that we have turned the page. The risk of serious mutations, such as the 'Omicron' we are currently facing, remains high and may lead to new waves of the pandemic, with serious repercussions for society, but also for the global economy, including the euro area. Under no circumstances should we be complacent. All relevant bodies need to be vigilant for the effective management of the consequences of the pandemic. It is essential that they continue to take steps to restore economic prosperity and promote social cohesion for all euro area citizens.’
PEPP ‘net monthly purchases will last at least until March 2022 and in any case until we judge that the pandemic crisis is over. It is considered very effective in containing the rise, due to high uncertainty, in government bond yields and the divergences between them. At the same time, the smooth functioning of the monetary policy transmission mechanism is ensured in all euro area countries. The effectiveness of the programme is mainly due to the pioneering flexibility in the composition of the Eurosystem's securities markets.’
‘… in the discussions on the strategy it was considered appropriate to build on the lessons learned from previous crises and to recognise the effectiveness of direct and meaningful monetary intervention through less conventional tools. That is why the recast of the strategy states that, in recognition of the policy interest rate threshold, the Governing Council will use these tools on a case-by-case basis, will continue to respond flexibly to new challenges and will consider new policy instruments when necessary.’
‘For macroeconomic stabilisation to be successful, monetary policy needs to continue to be complemented by targeted and coordinated fiscal measures.’

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.’

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.’

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.’