Reuters: Last week’s ECB debate on inflation was tense

Members of the European Central Bank who met last week sought greater recognition of the risks of inflation, but were rejected by the ECB’s chief economist, Philip Lane, in an unusually heated debate, Reuters sources said.

Central banks around the world, including the US, have acknowledged that inflation may be more persistent than originally expected, but the ECB is “stuck” with its narrative that rising prices will fall. from its target at the end of 2022.

In a -as described- tense discussion, several members of the board. questioned the quality of the ECB’s forecasts, citing the background, and argued that inflation would be higher than the Bank’s estimates at the end of next year.

“Many wanted to acknowledge the danger, but Philip (Lane) pushed them hard,” said one source.

“After a long discussion, we seemed to agree with the ‘small upside risks’ statement, but that was not in the statement either.”

The closest that ECB President Lagarde has come to this admission was when he stated that “there is probably an upside risk”, in response to a journalist question.

“The announcement did not give the feeling that was in our discussion”, stressed a second source.
Even when Lagarde sought consent, four board members opposed the ECB ‘s package of measures extending support.

Germany’s Weidmann, Luxembourg’s Gaston Reinesch and Austria’s Robert Holzmann voted against the measure, while Belgium’s Pierre Wunsch, who did not have the right to vote, also voiced opposition.

The ECB expects inflation in the fourth quarter of 2022 to reach 1.9%, from the current 4.9%.

Sources say that many people question the quality of the ECB estimates, which have been subject to major revisions for years, and that the models appear to be poorly equipped to calculate the effects of the unprecedented pandemic crisis.

Indeed, the Bank’s forecast for inflation in 2022 almost doubled to 3.2% last week, but the forecasts further increased moderately only with prices expected to be lower than the target in 2023 and 2024.

“It was not the friendliest discussion,” said another source. “It was quite intense at times and the dissidents came under strong individual pressure to agree with the majority.”