FRANKFURT (Reuters) – Eurozone inflation could exceed expectations in the short and medium term, and this prospect of rising prices justifies the end of emergency bond purchases by the European Central Bank (ECB) in March, said the head of the Dutch central bank, Klaas Knot, on Thursday.
“General inflation risks are again skewed upwards,” Knot said in a speech. “Upside risks, in the short to medium term, are mainly linked to more persistent bottlenecks on the supply side and stronger domestic wage and price dynamics.”
Knot, a hawk (an authority averse to maintaining stimulus) of the Governing Council, argued that even if these upside risks do not materialize, the bank’s baseline projection alone guarantees the end of the Emergency Purchase Program of the Pandemic (PEPP) of 1.85 trillion euros.
“The current baseline scenario at the ECB is consistent with the PEPP ending in March 2022,” he said.
Knot, however, appeared calm about the long-term inflation prospects, dwarfing some market fears that prices will spiral out of control.
He argued that the outlook for inflation is now “back on track” and that market-based inflation expectations are pricing higher prices broadly in line with the ECB’s 2% target.
“I welcome these developments very well,” Knot said. “Coming from an extended period of setbacks and risks of deflation, this is good news.”
The bank’s basic projection now forecasts inflation to rise by 4% at the end of the year, before cooling to below the target in 2022.
(By Balazs Koranyi)
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