ECB governors want inflation risks to be better recognized

Policymakers at the European Central Bank (ECB) sought greater recognition of inflation risks during their meeting last week, but were snubbed by the bank’s chief economist, Philip Lane, in an unusually intense debate, sources told Reuters.

Central banks around the world, including the Federal Reserve (Fed) of the United States, have recognized that inflation may be more stubborn and persistent than previously thought, but the ECB has stuck to its idea that growth in Prices will fall below the target level on its own by the end of 2022.

In what was described as an intense and tense meeting, a significant number of officials questioned the quality of the ECB’s projections, pointing to its checkered record, and argued that there is a risk that inflation will end next year above expectations. of the ECB.

“Some wanted to acknowledge the upside risks, but Philip (Lane) strongly objected ”, said a source. “After a long debate, it seemed that we agreed on a ‘small upside risks’, but even that did not appear in the statement”.

The closest that ECB President Christine Lagarde came to such recognition was when she said “possibly upside risk”In response to a journalist’s question.

“The statement did not fully deliver the flavor of our debate”Reported a second source.

As Lagarde sought consensus, four authorities opposed the ECB’s package of measures.

Germany’s Jens Weidmann, Gaston Reinesch of Luxembourg and Robert Holzmann of Austria voted against the measures, while Belgian Pierre Wunsch, who had no voting rights, also voiced opposition.

Inflation soared to 4.9% last month, the highest ever in the 19-nation bloc and more than double the ECB’s 2% target. It is likely to get closer to this figure in the coming months, but the bank sees that it will return to 1.9% in the fourth quarter of 2022.

Sources said several people questioned the quality of the ECB’s forecasts, which have been subject to major revisions for years, and that its models appear ill-equipped to make calculations in the face of the unique impact of the pandemic.

In fact, the bank’s inflation forecasts for 2022 almost doubled last week to 3.2%, but longer-term projections were only raised modestly, with price growth below target in both 2023 and 2013. Next year.

“It wasn’t the friendliest discussion. It was quite heated at times and dissidents received personal pressure to join the majority.“Said another source.