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By Aaron Eglitis and Carolynn Look
(Bloomberg) — The euro area’s inflation outlook may turn
out higher than currently anticipated if the coronavirus doesn’t
inflict any further shocks, according to European Central Bank
Governing Council member Martins Kazaks.
The region’s stabilizing economic recovery, persistent
supply bottlenecks and rising expectations all point to possible
faster-than-forecast price gains, he said in an interview on
Thursday. Just last week the ECB revised up its inflation
projections through 2023, citing improvements in the outlook as
one reason to pare pandemic bond buying.
“If Covid does not surprise on the negative side, there is
some upside for the inflation outlook over the medium term,”
said Kazaks, the governor of Latvia’s central bank in Riga. He
cautioned that “I am talking about decimals here,” and he
doesn’t yet see inflation at or above the ECB’s 2% goal over the
medium term.
The euro region is now enduring the fastest price increases
in a decade, with a rate of 3%. Officials view that spike as
largely transitory, expecting inflation to average 2.2% this
year and slow to 1.5% by 2023. 
“There is perhaps some upside for those numbers to be
revised up in the following forecasting rounds,” Kazaks said. “I
agree with the current outlook, but I would say that the balance
of risks for inflation are somewhat on the upside.”
After he spoke on Thursday, the ECB dismissed a Financial
Times report that said Chief Economist Philip Lane told analysts
privately officials expect to reach the target by 2025.

Wage Pressure

“We hear some anecdotal evidence that there could be some
wage pressures down the road, but we have not seen that yet in
the data,” Kazaks said. “There is no reason to expect that
inflation would be permanently very hot. If at some point
inflation will be significantly higher than our strategy and
monetary-policy mandate, then of course we will know how to
react.”
For now, ECB President Christine Lagarde insists that the
Governing Council’s decision to “moderately” slow stimulus at
its Sept. 9 meeting “isn’t tapering,” an emphasis that sets the
Frankfurt-based institution apart from the Federal Reserve and
the Bank of England, which are both closer to winding down
stimulus. 
Policy makers are in no rush to start such a debate, Kazaks
said, with their 1.85 trillion-euro ($2.2 trillion) pandemic
purchase program currently set to run until at least March 2022.

Officials will try to inform financial markets on the
future of the measure “as soon as it is reasonably feasible,” he
said, adding that “uncertainty is still high and it is
reasonable to maintain flexibility.”
“At the current moment, monetary support is still
necessary, fiscal support is still necessary,” Kazaks said. “But
as the economy improves, the support needs to be withdrawn so
that when the next crisis comes, we have again room to
intervene.” 
The Governing Council has yet to discuss whether and how it
will apply the greater flexibility of its pandemic program to an
older asset-purchase tool in future, he said.
Kazaks also argued that it will eventually be important to
revisit the institution’s guidance on how soon after ending bond
buying it would be willing to raise interest rates. So far, the
ECB has said asset purchases will end “shortly before” interest
rates begin to rise.
Some policy makers are concerned that by having delayed
expectations for an interest-rate hike at their July meeting,
that could also signal a longer-term commitment to asset
purchases.
“In the past, this link was used to strengthen forward
guidance,” he said. “We now have a much stronger and clearer
strategy and also a more forceful forward guidance, therefore
this link is not that crucial anymore.” Still, “we shall discuss
it and try to avoid the risk of the markets misunderstanding
us.”
*T
Read more:
ECB Slows Crisis Stimulus in Shift Lagarde Says Isn’t
TaperSchnabel: ECB Diligently Monitoring Risk of Higher
InflationSome ECB Officials Wanted Looser Link Between QE Exit
and Rates
*T

To contact the reporters on this story:
Aaron Eglitis in Riga at aeglitis@bloomberg.net;
Carolynn Look in Frankfurt at clook4@bloomberg.net
To contact the editors responsible for this story:
Zoe Schneeweiss at zschneeweiss@bloomberg.net;
Andrea Dudik at adudik@bloomberg.net
Craig Stirling