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Wednesday, December 8, 2021

ECB Should Keep Options Open After December Amid Uncertainty: Accounts

FRANKFURT. The European Central Bank should leave its policy options open after a decisive meeting in December, as uncertainty about the likely evolution of inflation is extremely high, policymakers concluded in October, according to meeting reports.

High inflation is still largely seen as temporary, reports have shown, but the current price spike will be longer than previously thought, raising the risk that wages will begin to adjust and keep prices high.

“It was warned that the data available in December would not resolve all the uncertainties around the mid-term inflation forecast,” reports showed on Thursday.

“It was considered important that the Governing Council retained sufficient choice for future monetary policy action, including after its December meeting,” the ECB said in its reports.

The comments appear to echo calls from conservative politicians like Jens Weidmann and Klaas Noth for the ECB to avoid extensive post-December commitments as inflation outlooks could change quickly.

In December, the bank will almost certainly agree to end the € 1.85 trillion ($ 2.08 trillion) emergency bond purchase program from March, but it will consider increasing other purchases to make up for the downturn.

While most policymakers seem to agree on the need for continued stimulus, opinions differ as to what support might be needed as the trajectory of inflation increased, risks were heightened, and forecasts should have been raised.

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“It has been argued that the longer the spike in inflation lasts, the more it will become rooted in long-term inflation expectations,” the reports showed.

However, the majority seemed to be of the opinion that even if the risks were shifted towards higher inflation, the ECB needed to be patient and not tighten measures prematurely, especially since wages did not show significant growth.

Political doves, who are likely to push for heavy bond purchases in December, argue that inflation will come down on its own, as one-off factors are the main culprit, while wage inflation, a prerequisite for sustained inflation, remains anemic.

Meanwhile, conservatives argue that even if temporary, high price increases will ultimately lead to higher wages, raising the risk that inflation will exceed the ECB’s target, a level it has underestimated over the past decade.

However, both sides agree that a rate hike next year would be premature, and disagreements over the pace of continued stimulus in the form of debt purchases.

“Market participants may have doubted the veracity of the forward-looking guidance of the Board of Governors,” the ECB said. “In this context, it was emphasized that the Governing Body must reaffirm … its determination to act decisively and persistently.”

(1 dollar = 0.8909 euros)

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