ECB Insight: For Knot, War no Inflation Game-Changer, But One More Reason to Worry
17 March 2022
By David Barwick – FRANKFURT (Econostream) – Russia’s invasion of Ukraine is no reason to think medium-term inflation prospects in the euro area have become less worrisome, European Central Bank Governing Council member Klaas Knot implicitly suggested on Thursday.
Various policymakers have expressed the idea that once past the short term, the inflationary impact of Russian dictator Vladimir Putin’s obsession with his neighbouring country could go in either of two directions.
Banco de España Governor Pablo Hernández de Cos on Tuesday said for example that while the increase in near-term price pressures made second-round effects more likely, the potentially ‘very significant’ growth-dampening impact ‘could reduce inflationary pressures in the medium term.’
Similarly, ECB President Christine Lagarde today said in the context of the attack that risks to growth ‘could depress medium-term inflation if it means the economy returns to full capacity more slowly.’
Bank of Greece Governor Yannis Stournaras, true to form, was unwilling to entertain the possibility of anything aggravating inflationary pressures and thus increasing the chances of a withdrawal of monetary support, categorically affirming the day after the invasion was launched that ‘in the medium term, the implications are deflationary’.
Knot of course is far from Stournaras’ end of the spectrum of monetary policy philosophies. But in contrast to his Greek colleague, Knot was not at pains to interpret developments so as to fit a preconceived objective.
Rather, the war for Knot seemed just one more reason - along with probably expansionary fiscal policy and the climate transition - that ‘inflation is likely to remain high for longer’.
Conspicuous by its absence was any obvious concern on his part that the war might be poised to take a toll on the euro area in terms of economic growth such that significant disinflation, let alone deflation, could be the upshot.
On the contrary, in language he could have probably employed equally well before February 24, Knot suggested that ‘the greatest challenge’ in the years to come – clearly not a reference to the short term – could actually be the avoidance of ‘excessive inflation’.
Monetary policy needed to ‘normalise in the years ahead’, he urged, a goal that was on his agenda well before Russia assaulted Ukraine.
‘The current, long-term unconventional monetary policy is giving rise to more and more risks and undesirable side-effects’, Knot said. ‘There is no longer any need for this policy now that the crisis phase of the pandemic is behind us and a 2% inflation rate seems likely in the medium term.’
The war, he effectively said between the lines, does not change this.