FRANKFURT – Euro zone inflation is at risk of overshooting the European Central Bank’s projections as the temporary factors behind its recent spike could seep into underlying price growth, Bundesbank President Jens Weidmann said on Wednesday.
Euro zone inflation hit 3% last month and policymakers expect it to move higher in the coming months before falling back below the ECB‘s 2% target early next year, a mark it has undershot for the past decade.
“Upside risks currently predominate, in my opinion,” Weidmann, one of the ECB‘s most conservative policymakers said in a speech. “If these temporary factors lead to higher inflation expectations and accelerated wage growth, the inflation rate can rise noticeably in the longer term.”
Weidmann added that an expansionary monetary policy is still appropriate but the ECB should also prepare for the end of its 1.85 trillion euro ($2.19 trillion) Pandemic Emergency Purchase Programme (PEPP) as the economy is now booming and inflation is on the rise.
“The first P in PEPP stands for pandemic, not permanent, and for a good reason,” he said about the bond purchase programme, which is now slated to end on March 31, at the earliest.
As the buys should not be ended abruptly, the ECB should gradually wind them down even before signalling their ends, Weidmann added.
Although two conservative policymakers this week called on the ECB to reduce PEPP purchases at their Sept 9 policy meeting, ECB chief economist Philip Lane has said that the ECB was committed to maintaining “favourable financing conditions,” so the actual decision would be a marginal move around that central commitments.
Weidmann was also upbeat on growth, arguing that growth in Germany is robust and the third quarter will outperform an already strong spring quarter.