FRANKFURT—Euro zone inflation could exceed the European Central Bank’s forecast in the long term, so there is no reason now to boost a legacy bond purchase programme when an emergency scheme ends next March, ECB policymaker Madis Muller said.
The ECB is debating life after the 1.85 trillion euro ($2.08 trillion) Pandemic Emergency Purchase Programme expires.
A murky economic outlook has left its 25-member Governing Council unusually divided over what course to steer at a crucial policy meeting on Dec 16—decisions that could determine its actions over much of 2022 and possibly beyond.
Conservative policymakers argue that inflation, running at more than twice the ECB’s 2 percent target, could stay too high even in the long term, while doves warn that price pressures are still too weak, so abandoning ultra-easy monetary policy now would risk undoing years of stimulus.
“The Pandemic Emergency Purchase Programme (PEPP) can go to zero in terms of net purchases by March 31,” Muller, Estonia’s central bank governor, told Reuters in an interview.
“Beyond that, it’s not obvious to me that we should—in addition to what we have already communicated in terms of continuing purchases under APP—commit to adding further stimulus on top of what we have already,” he said.
Bond buys under the Asset Purchase Programme (APP) are running at 20 billion euros a month and market analysts expect this to double from April, replacing much of the lost stimulus from PEPP, which has kept the bloc afloat but is now seen as having completed its mission.
As uncertainty is unusually high with regard to both growth and inflation, the ECB should keep its options open to change course quickly, if needed, Muller argued.
“Given the uncertainty surrounding the near term outlook, I think it would be wise not to commit to specific level of purchases for more than a few quarters ahead,” he added.
The ECB should also not yet communicate an end date for the bond buys, keeping its options open.
Challenging the Narrative
The bulk of the disagreement among policymakers centres on inflation, which hit a record 4.9 percent in November, a possible peak before a slow decline.
The ECB has long argued that high inflation is temporary and will quickly fall next year, leaving price growth for years below its target, a mark it undershot for the better part of the last decade.
But a growing number of policymakers challenge this narrative as energy prices stay high, industrial supply chain bottlenecks persist, house prices rise and labour markets tighten.
“It’s most likely that near-term forecasts will be raised, and I wouldn’t be surprised if we’re above target next year,” Muller said. “When it comes to the longer-term projections, I think the outcome will be higher than indicated in the September projections.”
“Risks are to the upside,” he added.
While the Omicron variant of COVID-19 could dampen growth, the economy has learned to function under a pandemic so its impact should not be large, Muller added.
“I would expect the supply chain issues and the restrictions to dent fourth quarter activity,” he said. “But in terms of the medium-term outlook, we still shouldn’t be too far from what we expected in September.”
($1 = 0.8886 euros)
By Balazs Koranyi