AMSTERDAM, March 6 (Reuters) - The following is the text of a Reuters interview with European Central Bank policymaker and Dutch central bank chief Olaf Sleijpen. For an interview story, click here. Q
ECB’s Olaf Sleijpen Discusses Policy Outlook and Inflation, Cautious on Risks
Key Insights from Olaf Sleijpen’s Reuters Interview
AMSTERDAM, March 6 (Reuters) - The following is the text of a Reuters interview with European Central Bank policymaker and Dutch central bank chief Olaf Sleijpen.
For an interview story, click here.
Impact of Geopolitical Events on Economic Outlook
Q: A few weeks ago you described the current environment as a central banker’s nirvana. How is the war in the Middle East impacting this?
A: Obviously, things have changed. Are we still in the nirvana or has that been displaced? When I made that comment, I also made clear there were lots of risks. We have seen one of those risks materializing over the last five days or so. Given that we’re only talking about days still, it is too early to say what this will mean for the economy or monetary policy in the long run.
However, what you’re seeing in terms of market reaction seems to be more or less aligned with what you would expect in an economics textbook.
While I would not use the word nirvana or Goldilocks anymore, I haven't dramatically changed my view on where we are, which is still a good place.
We are truly data dependent. So, it depends on how things will develop and how we are going to assess those developments going forward.
Current Assessment of Economic Conditions
Q: So, you’re saying we’re not in a dramatically different place now?
A: In my view, that’s where I still am, but everything depends on how this conflict will develop.
Scenario Analysis and Policy Response
Q: After Russia attacked Ukraine, the ECB produced several scenarios in its economic projections. Is that the way to go again?
A: All projections contain a sensitivity analysis, so it’s part of the exercise. I haven't seen the March projections yet but I might very well imagine a sensitive analysis or scenarios being part of the documentation.
Timing of Policy Changes
Q: Some of your colleagues have said that no matter what, March is too early to change policy. Do you share that view?
A: I just said where I stand: I'm still in the good place, so, yes.
Balancing Inflation and Growth Risks
Q: An oil price shock raises inflation but weighs on growth, which has a disinflationary impact. How do you balance these two factors?
A: That very much depends on what are the scenarios that we're talking about. There’s also a third factor here, which is the exchange rate, as we’ve seen a dollar appreciation lately.
So, I think you have to take all those factors into account. And it also very much depends again how things evolve, to what extent there will also be serious disruption to supply chains, etc. In some scenarios the inflation impact is going to be large and in other scenarios the growth hit is going to be quite large.
Need for Clarity and Data
Q: How long would you need to have a clearer picture.
A: If you would put what we have been seeing the last 4 or 5 days in a model, then probably the impact on inflation is higher than the impact on growth. But that's just based on these 4-5 days and only based on models. A model is good, but the picture is always much more complicated. In the end, actual developments count. Maybe there is a deal tomorrow or the day after. Or maybe there is escalation.
Indicators for Policy Shift
Q: What would you need to see to say this is not the good place anymore?
A: It's a mixture things, not one particular number or indicator moving from, let's say, green to orange. Clearly inflation expectations are important. But also underlying price indicators are important, and so are projections, including the sensitivity analysis around the projections. There's not one indicator that would trigger me to change my mind.
Lessons from Previous Inflation Surges
Q: What are the lessons of the 2021/22 inflation surge for you for this scenario?
A: First off, let me say we learned our lessons from that episode.
I understand why people are trying to make the comparison with 2021/2022. But we should be quite careful in making such comparison because the situation is different.
The nature of the shock is different. Monetary policy is in a neutral setting now, which wasn’t the case back then. There was also the reopening of the economy after the pandemic, in combination with accommodating fiscal policies, pushing up demand. So even before the supply shock, underlying inflation was already building up from the demand side.
One of the lessons of that period is that we need to be aware of the risks around supply side shocks. They are difficult to manage from a monetary policy point of view and may have an impact on inflationary dynamics at a certain point, where the central bank has to react. This is an important lesson.
But as I said, we should be careful in making these comparisons because we are clearly not in the same situation.
Market Expectations and Inflation Trends
Q: Markets are now pricing a small chance of a rate hike this year. Do you think that's premature? Do you think markets are getting ahead of themselves?
A: I honestly don't know. It very much depends on how things will unfold.
Domestic and Services Inflation
Q: Domestic inflation is sill high and services inflation accelerated last month. How concerning is that?
A: It's somewhat puzzling because wage inflation is coming down. We have seen a number of adjustments in the way the inflation numbers are being calculated, particularly with regard to package holidays, and that might play a role.
But if you look at wage inflation, the picture doesn't completely add up.
Baseline Projections and Policy Consistency
Q: Were you comfortable with the pre-war baseline of projections showing modest undershooting?
A: If we go back a week, I would have said that I’m pretty comfortable with the baseline scenario. Also because inflationary expectations were quite well anchored at 2%. The undershooting was also not substantial.
You will now ask me what substantial is, then. I wouldn’t want to put a number on that.
Policy on Temporary Deviations
Q: Your strategy stipulates modest, temporary deviations from target are acceptable in both directions. Then surely this also applies if there is a moderate overshooting because of oil prices now?
A: Exactly. We should be consistent
