Tuesday, September 27, 2022

Inflation could prompt ECB to tighten policy quicker

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The European Central Bank (ECB) could tighten policy sooner than many expect as inflationary pressures could prove to be persistent, ECB policymaker Robert Holzmann said in a contribution to Eurofi Magazine on Wednesday.

The ECB, which meets on Thursday, has kept policy ultra-easy since the start of the pandemic and it promised an even longer period of accommodation when it unveiled a new strategy in July. But inflationary pressure has built quicker over the summer months than many predicted.

“There is the possibility that we may be able to normalize monetary policy sooner than most financial market experts expect,” Holzmann, Austria’s central bank chief, said.

Holzmann said he saw potential upward price pressures from persisting global supply bottlenecks, labor shortages, pent-up household demand, the cost effects of climate change policies, and higher headline inflation getting entrenched into expectations.

The ECB is on Thursday expected to reduce stimulus while still promising copious support for years to come.

“This does not mean that we will withdraw accommodation prematurely but rather that accommodation will be needed for a shorter period than what markets expect,” Holzmann said.

Holzmann also said ultra-easy monetary policy may lead to financial imbalances, adverse distributional effects and inefficient capital allocation.

Source: Reuters, Frankfurt

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