Banco de Portugal’s Serra: ECB Open-Minded in Case Inflation Remains Above 2% Beyond 2022

11 February 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank is open-minded about the future development of inflation, in particular in case it turns out that inflation is seen topping 2% beyond the current year, Ana Paula Serra, member of the board of directors of Banco de Portugal, said Friday.

In a speech at an economics conference of students, Serra said that euro area growth would probably ‘remain muted in the early part of 2022 due to pandemic containment measures, high energy costs and shortages of equipment and labour’, but that these dampening factors ‘should ease during 2022 and prospects are good that activity will bounce back, driven by robust domestic demand.’

Inflation would probably stay high for longer than earlier thought and was subject to uncertainty, but would still decline over the course of 2022, she said.

‘In any case, the pressure on prices is upsetting markets and investors and there is a huge debate on whether the ECB should be moving faster’, she said. The ECB would only hike rates once asset purchases have been concluded, and next month would consider what to do about these purchases for the rest of the year, she said.

In my view, all in all, the … recent statements [of ECB President Christine Lagarde] seem to suggest that the ECB is open minded, just in case inflation overshoots unexpectedly and inflation remains above 2% longer than expected, beyond 2022’, she said. ‘The ECB is monitoring closely inflation developments and will be ready to act promptly, if required.’

Some people would like the ECB to move more quickly so that expectations do not dis-anchor, she said.

‘Key to the decision is to understand how much inflation comes from excess demand due to ECB monetary policy and how much is coming from supply shocks, green transition and other disruptions including the present geopolitical conjuncture’, she said. ‘Some of these probably will ease this year but some may not.’

‘In any case, the decision of the ECB will always have to balance the costs of raising interest rates prematurely, risking stopping the healthy recovery from the pandemic crisis, and those that result if the ECB fails to raise interest rates early enough, having to raise them later, even further, to sustain the overshooting’, she said.

The key is thus to find the ‘perfect timing’, she said.

‘Overall, the progress on inflation towards the target and the economic recovery suggests that is still possible to have a step-by-step reduction – and not a sudden reversal in easing -  in the pace of asset purchases over the coming quarters’, she said.

‘Yet, in light of current uncertainty, I would say that in 2022 it is more important than ever to maintain flexibility and optionality in the conduct of monetary policy to make sure inflation stabilises at 2% over the medium term’, she added.