ECB 'increasingly likely' to hit 2% inflation goal, Kazaks says

ECB 'increasingly likely' to hit 2% inflation goal, Kazaks says
ECB 'increasingly likely' to hit 2% inflation goal, Kazaks says   -   Copyright  Thomson Reuters 2021   -  
By Reuters

<div> <p>By Francesco Canepa</p> <p><span class="caps">FRANKFURT</span> – The European Central Bank is “increasingly likely” to achieve its goal of stabilising euro zone inflation at 2% but needs proof of that happening before taking more stimulus away, <span class="caps">ECB</span> policymaker Martins Kazaks told Reuters.</p> <p>The <span class="caps">ECB</span> took another small step in rolling back crisis-era bond purchases on Thursday but promised to hold down borrowing costs next year because it still sees inflation lagging below its target in the following two years.</p> <p>Kazaks, the Latvian central bank governor, said inflation was heading towards the <span class="caps">ECB</span>’s goal, also thanks to a strong rebound in economic growth after the pandemic, but it still needed a boost from wages if it were to stabilise there.</p> <p>“The main conclusions from the forecasts is that growth is still quite dynamic and that we’re moving towards our inflation target over the medium term of 2% but we’re not quite there yet,” he said in an in interview. “It’s increasingly likely that we meet the target.”</p> <p>Inflation hit a euro-area record of 4.9% last month and the <span class="caps">ECB</span> said on Thursday it expected it to come in at 3.2% next year before easing back to 1.8% in the following two years.</p> <p>Based on these new projections, the <span class="caps">ECB</span> on Thursday decided to end its pandemic-related bond purchases but effectively ruled out a rate increase before 2023 and also pledged to keep its bond stash from shrinking until 2024.</p> <p>The meeting was tense, with conservative policymakers from Belgium, Germany and Austria opposing what they saw as excessive largesse and emphasising the risk of too high inflation.</p> <p>And on Friday several <span class="caps">ECB</span> governors, including Portugal’s Mario Centeno, warned inflation may come in higher than the <span class="caps">ECB</span> expects.</p> <p>Inflation was mostly at the <span class="caps">ECB</span>’s target in the first decade since the euro’s launch in 2002 but, after the euro zone’s debt crisis of 2011-12, the bloc was plagued by almost ten years of disappointing price growth.</p> <p>For Kazaks, who backed Thursday’s decision, the euro area was “getting close to a turning point” again.</p> <p>“It’s entirely normal that at a time when the ship is starting to turn there are differences of opinions,” he added.</p> <p><span class="caps">LABOUR</span> <span class="caps">MARKET</span></p> <p>Kazaks said the labour market held the key to whether inflation stabilises at 2% after the current hump and he saw a good chance of a positive feedback loop between prices and wages kicking in.</p> <p>“The labour market will be very important for that and the persistence of inflation will also feed into the expectation-forming mechanism,” he said.</p> <p>“The labour market so far has performed quite nicely so there is a good chance we will see those mechanisms kicking in.”</p> <p>But he warned against jumping to that conclusion already as most models that the <span class="caps">ECB</span> uses still pointed to inflation falling below 2%.</p> <p>He added the central bank should wait for new economic projections in March and June before making changes to policy. </p> <p>“Currently we still see that the largest weight of forecast distribution is still below 2%,” he said. “That’s why we will take decisions step by step and cautiously and when we revise our forecasts we will have more clarity on it.” </p> <p/> </div>