ECB’s Herodotou: Need to See Mid-Term Inflation Outlook and Wages Versus Productivity

16 February 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Constantinos Herodotou on Wednesday sounded in no hurry for the ECB to initiate a tightening cycle and put the burden of any policy change on the upcoming set of staff macroeconomic forecasts.

In an interview on CNBC, Herodotou, who heads the Central Bank of Cyprus, said that whether it is now appropriate to start thinking about winding back the APP ‘will depend of course on the next ECB staff projections, which we will have in March.’ For now the medium-term outlook was below 2%, based on the last projections, he reminded.

‘But we need to see what the dynamics are in the March forecasts, which includes as per the forward guidance not only the medium-term outlook for inflation, but also … the wage dynamics, which have to be compared with productivity growth’, he said.

The forward guidance and policy statements make clear how the ECB will proceed, he indicated, with ‘any potential move in the rates’ occurring only after net asset purchases have been ended. The March forecasts will show how close the ECB is to seeing its forward guidance criteria fulfilled, he said.

‘And should we see that that criteria are fulfilled from a forward guidance perspective, then the APP should be calibrated accordingly, so that the net purchases are terminated before any rate move’, he said.

Whether he would support removing the word ‘shortly’ from the ECB’s forward guidance depended on the next forecasts as well, he said.

‘And when we say “forecasts”, I need to repeat again, it’s not only the medium-term outlook on inflation, which has to be sustainably at 2%, but we need to see whether inflation expectations have moved’, he said.

‘In our last Governing Council monetary policy meeting, inflation expectations were still well anchored’, he continued. ‘And we need to see whether there is wage growth that is beyond productivity growth. I think these are the variables that we need to examine on the basis of the March forecasts and analysis in order to decide any time in between the ending of the APP and any move on the rates.’