ECB's Strategy if Inflation Exceeds Expectations
FRANKFURT (Reuters) – The European Central Bank would tighten policy if inflation was seen holding above its target, but such a scenario appears less likely for now, Philip Lane, the bank‘s chief economist, told a Lithuanian newspaper just over a week before the next policy meeting.
Inflation hit 5% last month, the highest on record for the euro area. However, the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB sees it dropping back under the 2% target in the fourth quarter, even if some policymakers question this projection, calling it overly optimistic.
“If we saw the data coming in to suggest that inflation would be too high relative to 2%, then of course we would respond,” Lane told Verslo žinios.
“So we will adjust all of our policies − whether that’s asset purchases, the targeted lending programme, our interest rates − to deliver that goal.”
Lane said that, even under this scenario, the sequence of the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB’s moves would follow the bank‘s guidance, so the first step would be to end asset purchases and only after that would the bank consider raising interest rates.
The ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB plans to reduce the volume of asset buys step by step this year but expects to continue them indefinitely and has essentially ruled out a rate rise this year.
“I find it less likely to think about a scenario where inflation is persistently, significantly above 2%, which would require a serious tightening,” he said, adding that wage growth remained unconcerning.
If inflation stabilised around the 2% target, the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB would “over time” normalise policy, Lane said, without discussing what the normal setting would be after a decade of stimulus.
Lane also said the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB was increasingly relaxed about the economic impact of COVID-19’s Omicron variant.
“It is not turning out to be a factor that will influence the activity levels for the year, it’s more the activity levels for a few weeks … I think there’s less concern about Omicron than we had in December,” he said.
The ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB will next meet on Feb. 3 but no policy move is expected as the bank unveiled a complex package of measures in December.
(Reporting by Balazs Koranyi; Editing by Alex Richardson and Kevin Liffey)
