ECB May Have More Ground To Cover After March, Reinesch Says

1 March 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Gaston Reinesch said on Wednesday that ECB policy tightening may have more ground to cover after March.

Reinesch, who heads the Central Bank of Luxembourg, said in an online blog that he expected consumer prices to continue to rise fast and inflation to remain far above the ECB’s target for a considerable period of time.

'Depending on the medium-term inflation outlook, it cannot be excluded at all that more ground may need to be covered after the Governing Council monetary policy meeting in March with a view to reduce inflation over time and to guard against the risk of an upward shift in inflation expectations', he said.

'Any further steps, whether in continuation of the current pace or at a different pace, will be taken accounting for - among others - the March 2023 ECB staff projections and an assessment of the dynamics of underlying inflation and will be motivated by the firm determination to reach the medium-term inflation target in a timely manner', he said.

Energy prices had declined substantially and this would naturally influence headline inflation, he acknowledged. 'On their own, however, substantially lower energy prices are currently no reliable indicator when assessing the medium-term outlook for price stability', he said.

Rather, he said, 'energy price developments blur the signal of headline inflation for the medium-term inflation outlook in the coming months.'

Moreover, he continued, despite weaker non-energy price pressures, 'it stands to reason that consumer prices continue to rise fast and that inflation remains far above the medium-term target (for some time).'

Core inflation was 'of particular importance' at the moment, he argued. Only after price shocks and base effects fade out of inflation measures would headline inflation 'adjust to levels determined by underlying inflation pressures, which are mainly determined by wage and profit developments which, in turn, depend – among others – on inflation expectations.'

Lower energy prices recently meant headline inflation could turn out to be tamer than predicted by the ECB's last macroeconomic forecasts, he said.

'That said, it is very uncertain whether energy prices remain at their present relatively low levels', he continued. Even if they did, on the one hand there was uncertainty about their pass-through to headline inflation, and on the other, this would imply a smaller disinflationary impact from fiscal measures intended to offset expensive energy, he said.

All else equal, fiscal measures would ‘mechanically result in higher headline inflation once they are withdrawn (in 2024 in particular)’, he said.

He repeated the ECB’s guidance from February about the rate hike foreseen at the upcoming meeting: ‘In view of the underlying inflation pressures the Governing Council intends to raise interest rates by another 50 basis points in March and will then evaluate the subsequent monetary policy path.'