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Inflation risks in the euro area would increase

(Bloomberg) – The eurozone is facing the possibility of faster-than-expected inflation triggered by supply disruptions and a rebound in wages, said Klaas Knot, a member of the Governing Council of the European Central Bank.

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“Headline inflation risks are again tilted to the upside,” Knot said Thursday in a webinar. “Risks to the upside, in the short and medium term, are mainly linked to more persistent bottlenecks in supply and stronger internal price and wage dynamics.”

The Dutch central banker added that it appears that investors are taking the possibility of higher inflation seriously, and that after a period of setbacks and the threat of deflation, “this is good news.”

Knot’s comments precede a major debate at the ECB as it prepares for a transition to post-pandemic stimulus at a time when global counterparts, who are increasingly focused on the threat of a price spiral, are removing support. The institution is expected to announce the next steps for its emergency bond purchase program in December.

Consumer prices in the 19-nation currency bloc are currently rising at an annual rate of 3.4%, much faster than the ECB’s 2% target. Officials have insisted the increase is largely transitory and related to supply shortages due to the reopening of global economies.

Some ECB policy makers, including Knot, have recently begun to warn that price pressures could become more persistent, setting the stage for an intense discussion about the future of stimulus.

“The current ECB baseline scenario is consistent with the completion of the pandemic emergency purchasing program in March 2022,” Knot said. “This, however, does not mean the end of loose monetary policy.”

Knot said the central bank’s efforts to create a lasting inflation trend may involve exceeding 2% for some time, but added that it would not be “proportionate to use asset purchases to actively fight that excess.”

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