Some eurozone central bankers see the ECB underestimating the risks of inflation

The European Central Bank may underestimate the risks of inflation, some eurozone central bankers have warned, just hours after the ECB extended its reinvestment timeline for the PEPP program.

Inflation has surpassed even the most pessimistic forecasts in recent months, and the ECB nearly doubled its forecast for 2022 on Thursday, but continued to argue that long-term inflationary pressures are not significant and that rising prices could fall from the 2% inflation target.

However, the governors of the central banks of Germany, Portugal and Lithuania have expressed concern about the ECB’s estimates, noting that inflation risks exceeding the central bank’s forecast, as wage increases could become more persistent and to fuel rising prices.

The central bankers of France and Lithuania, meanwhile, have argued that inflation may be at a turning point, so a return to the extremely low pre-pandemic levels is unlikely.

“Inflation risks are rising, both in Germany and in the eurozone,” said Bundesbank President Jens Weidmann, who has often criticized the ECB for its extremely accommodative monetary policy. ignore these dangers. “We have to be vigilant.”

Inflation hit a record 4.9% last month and is expected to fall to just 3.2% next year, according to forecasts released by the ECB on Thursday, when policymakers agreed to end the emergency program. stimulus in March but boosted another bond-buying program, effectively ruling out a 2022 rate hike.

Advocating with Weidmann, Lithuania’s central bank member Gediminas Simkus also warned that inflation could exceed the ECB’s estimate of 1.8% for 2023 and 2024.

“The risk balance is leaning towards higher inflation due to Omicron, uncertainties, ongoing supply chain turmoil, higher energy prices, transmission to producer prices. And that means the risks to GDP growth are down.” said Simkus.

Portugal’s central banker, Mario Senteno, who usually sits with the more moderate, also agreed.

“The euro area risk balance (inflation) is up,” he told reporters, warning of the risk of secondary effects from rising inflation.

Several ECB policymakers questioned the central bank’s inflation statement on Thursday, warning that current models may not be accurate in such an unusual setting.

Lithuania’s central bank governor Martin Kazaks, who backed the ECB’s decision on Thursday, said disagreements were expected as the ECB “is approaching a turning point” and is increasingly likely to meet its inflation target. .

“It’s perfectly normal at a time when the ship is starting to turn around to have different views,” he told Reuters.

France’s central bank governor, François Villeroua de Gallo, meanwhile, said the key risk of inflation was limited and that rising prices were unlikely to return to pre-pandemic levels when the ECB failed to meet its target. its on inflation for almost a decade.