(Bloomberg) — Officials from across the euro area called for vigilance on inflation Friday after the European Central Bank’s updated forecasts showed price pressure close to the institution’s target in the coming years.
Bank of France Governor Francois Villeroy de Galhau said the difference between the new forecast for 1.8% inflation in 2023 and 2024 and the ECB’s 2% target is within the “margin of uncertainty.” In a Bundesbank report showing German inflation will run above 2% through 2024, Jens Weidmann urged vigilance as he sees “risks to the upside” throughout the currency bloc.
“We shouldn’t give exaggerated importance to a 0.2 point gap,” Villeroy said on BFM Business radio. “There will be a tight piloting of monetary policy depending on the real situation.”
The closer alignment on a hawkish stance marks a shift at the core of the central bank from before Thursday’s meeting, when policy makers had instead stressed inflation would prove transitory.
Officials concluded during their policy update that the improved outlook was strong enough to permit an exit from a crisis stimulus in March. Policy makers opted to briefly boost normal bond-buying to avoid what President Christine Lagarde called a potentially “brutal transition.”
Some governors disagreed with the decision lengthen the reinvestment timeframe of their emergency bond-buying program, however, arguing it didn’t conform to the aim of exiting crisis measures, according to people familiar with the matter. Several policy makers cast doubt on the likelihood of inflation slowing to exactly 1.8% in line with ECB forecasts, they said.
Estonian Governing Council member Madis Muller echoed that sentiment in public remarks on Friday, saying the ECB is prepared for the possibility that it may need to tighten faster as it is no longer worried about “dangerously low price rises in the long run.” His Lithuanian counterpart — Gediminas Simkus — also said inflation risks were to the upside.
Yet Finnish governor Olli Rehn sounded a more cautious tone on the price outlook than some of his colleagues.
“There is considerable uncertainty about the path of inflation,” he said. “Factors that have been driving inflation will not lead to a longer term upsurge in inflation unless they are accompanied with second round effects.”
Meanwhile, France’s Villeroy sees the start of a new era.
“In some ways there is a new inflation regime around the 2% target that looks more like what we had before the financial crisis, in the years from 2000 to 2007,” he said.
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