Tuesday, 19 October, 2021
TEXT-Reuters interview with ECB policymaker Vasle – Reuters News
TEXT-Reuters interview with ECB policymaker Vasle – Reuters News
Sentiment:
Mostly negative
Mostly negative
19-Oct-2021 12:00:01
Oct 19 (Reuters) – The following is the text of a Reuters interview with European Central Bank policymaker and Slovenian central bank Governor Bostjan Vasle.
For an interview story, click on: (Full Story)
Q: How did your view on inflation change in recent months?
A: Inflation dynamics have changed quite significantly over the past year. We entered this crisis with relatively low inflation rates, then at the beginning of the pandemic, we moved into a deflationary territory. Now inflation is on the increase again. I share the view that most of the factors behind this increase are of transitory nature and are one way or another related to the pandemic crisis.
To mention the three most important: first are energy prices, which are now returning to or even exceeding the levels we witnessed before the crisis. Second are one-off measures in some of the biggest economies, like the VAT changes in Germany. The third one relates to the fact that the health situation is not equal around the globe and the recovery is consequently not well balanced. The result is that we have problems with supply chains. Some bottlenecks are also related to the problems in the transport sector.
At the moment, we see only limited second round effects, regarding inflation expectations and labour market developments. But at the same time, there are early signs that in parts of the economy and certain regions, the risk regarding the labour market could become more material. In some parts of the economy, labour is in short supply and if this trend will continue, or spread to other sectors, it could pose a risk to inflation. That’s why I think we should be very careful about second round effects.
Q: When you say most of the inflation is transitory, that means some of it is not. Do you then expect some of this inflation to linger beyond this one-off shock?
A: We have to wait and see what happens to these bottlenecks in the supply chains. It’s possible that firms will adapt by moving parts of their production closer to the production lines. If this starts to happen to a greater extent, it will cause inflation pressure that are not so transitory anymore.
Q: Do you remain comfortable with ECB staff projections over the longer term?
A: Most probable scenario remains that current rise in inflation is largely temporary and inflation will be lower in the next years. But the risks for possible deviation is getting bigger.
Q: When you talk to companies or executives, do you already see evidence of wages moving higher?
A: There is some evidence but at the moment, it’s still anecdotal. In some of our industries and services, labour shortage is becoming more pronounced and there are demands for higher wages. Although this is not a general trend I’m stressing it’s important to monitor these developments very closely.
Q: Are the bottlenecks simply delaying growth, i.e. changing the growth profile? Or are we losing some growth permanently?
A: It’s not black and white, but it’s much closer to shifting.
Q: What is the policy implication of these inflation developments?
A: We discussed what is happening in the real sector, regarding growth, growth prospects and also inflation. There is a third important element, which is financial markets. Conditions on the financial market are very favourable at the moment. If these trends continue, then in next March it will be appropriate to end PEPP, as announced when the programme was implemented. It’s also important to emphasize that even when we decide to end it, we’ll continue to provide plenty of liquidity to the economy with our other instruments.
Q: Market expectations are for the ECB to expand Asset Purchase Programme volumes when PEPP ends. Are you comfortable with these expectations?
A: At the moment, it’s important to concentrate on PEPP and the factors which will contribute to our decision on its termination. We’ll monitor closely developments in the real sector and financial markets, and if needed decide on other measures. But as I said, we still need to provide and will provide ample liquidity to the sovereigns and to the business sector and citizens as well.
Q: Is it appropriate to carry over the PEPP’s flexibility to the APP?
A: We implemented PEPP in under very special circumstances. It was the biggest crisis of our lifetimes. This warranted special response from us and the flexibility it incorporates was appropriate. When the situation normalises, I’m not against a discussion regarding additional flexibility to our existing instruments. But I’d like to stress that in normal times, this sort of extraordinary flexibility would not be warranted.
Q: Are you open to increasing the limit on buying supranational debt?
A: This would be a natural proposal and I expect it to be part of our discussion.
Q: The date for interest rate lift-off has moved up to the end of next year. Are you comfortable with this?
A: I find two aspects relevant to answer this question. The first is that the move of lift-off date is accompanied by an increase in inflation expectations. And the other is the improvement in macroeconomic developments. It should be noted that these expectations have in the past also been volatile and substantially influenced by temporary drivers. I believe that with our forward guidance, we provide enough certainty on our future decisions regarding rates.
Q: So, you’re not worried that lift-off and forward guidance seem to be out of sync?
A: I think we made clear what our intentions are and what will be the most important developments that will influence our decisions. So, at the moment, I wouldn’t put too much emphasis on this shift.
Q: Given the recent rise in yields, are we still enjoying favourable financing conditions.
A: Generally speaking, yes. Looking for example at real interest rates, the situation for sovereign debt is still very favourable and the same holds true for non-financial institutions. We were quite successful with providing favourable financing conditions across the board.
Q: That also means that the recent rise in yields is not excessive?
A: The rise in nominal yields is related to improvement in the economic situation and consequently higher inflation. So, from the prism of real developments, financing conditions remain favourable.
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