ECB policymakers recognize growing inflation risk

The headquarters of the European Central Bank (ECB) is pictured in Frankfurt, Germany July 8, 2020. REUTERS / Ralph Orlowski // File Photo

FRANKFURT, Sept. 21 (Reuters) – European Central Bank policymakers still view the recent spike in inflation as temporary, but a growing number appear to recognize the risk that price growth will exceed their relatively benign projections.

Inflation hit 3% last month, well above the ECB’s 2% target and could even climb to 3.5% by November, but the bank then sees a rapid drop that will bring the price growth below 2% for the coming years.

Soaring commodity prices, supply bottlenecks and growing signs of labor shortages are challenging this “bumpy” pattern of consumer price growth, however.

ECB Vice President Luis de Guindos stuck to the main ECB scenario, but pointed to the upside risks and warned that the bank had to be “very vigilant” about the risk of temporary increases in prices. prices don’t become permanent.

“Some countries in Europe have indexed pensions and civil servants’ salaries to inflation,” de Guindos said in an online conference with the Financial Times.

“This should be avoided because if you have a clear indexation of the economy to the evolution of a temporary shock… then you can convert that temporary upward movement in inflation into something much more permanent. is something we should avoid. “

He also warned that commodity prices and production bottlenecks risk creating “second round” effects on inflation.

Greek central bank chief Yannis Stournaras acknowledged that real price growth could exceed the ECB’s forecast, but argued that this should not force the ECB to tighten policy.

“We have accepted that there is an upside risk to inflation,” Stournaras told Politico in an interview. “In the past, however, we have overestimated inflation [on the higher side], expecting it to move towards 2% in the medium term. “

The ECB has exceeded its target for most of the last decade and policymakers now argue that after such a long period of failure the bank should not act early and should even tolerate a slight overshoot to ensure that ‘it does not tighten its policy prematurely.

Reporting by Francesco Canepa and Balazs Koranyi; Editing by Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.

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