By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Olaf Sleijpen said on Wednesday that the ECB's path back to its 2% inflation target was likely to be long, dependent on "some tightening" and subject to upside risks.
In a speech at the European Economics and Financial Centre in London, Sleijpen, who heads De Nederlandsche Bank, said that although the latest ECB staff projections included lower near-term GDP growth, the economy remained "relatively resilient."
“Higher energy prices, increased uncertainty, and weaker real incomes are weighing on consumption and investment,” he said. “This is consistent with recent survey indicators, which point to subdued economic activity.”
A gradual recovery was expected further ahead, he added.
Sleijpen said energy inflation could decline later in the projection horizon but noted that core inflation had been revised higher because of persistent services inflation and the gradual pass-through of higher energy costs.
“Taken together, these projections suggest that risks to inflation remain upward,” he said. “But the persistence of the shocks we face, especially regarding energy prices, and therefore the appropriate policy response, remain uncertain.”
One factor behind the ECB's latest rate increase was that simulations indicated tighter policy was warranted even under the milder scenario considered by policymakers, he said.
Second-round effects would be key in determining the monetary policy response to the energy shock, he said.
“A repeat of 2022 appears less likely, but it cannot be excluded,” he said.
Sleijpen said a recent DNB analysis showed that expectations were broadly anchored to 2%, adding that after the 2022 inflation shock dispersion had increased, while sensitivity to shocks was now higher.
He said long-term inflation expectations remained broadly anchored around the ECB's 2% target among financial markets and professional forecasters, although households appeared less firmly anchored and more sensitive to visible increases in energy and food prices.
“Anchored expectations give us room to look through temporary shocks,” he said, adding that “increased dispersion raises the risk that shocks may propagate more widely.”
He noted that this required “close and continuous monitoring.”
Inflation expectations remained broadly anchored, "but vigilance is essential," he said, given that the expected return of inflation to 2% was "long, predicated on a market path that contains some tightening, and surrounded by upside risks."
The ECB should respond when there is a risk that inflationary pressures become persistent and should base its decisions on whether a rate increase is warranted across a range of scenarios, from milder to more adverse outcomes, he said.
"There is no room for complacency," Sleijpen said, adding that steadiness was as important as resolve and that policymakers should not react to every short-term fluctuation in inflation.
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