Brussels (Brussels Morning) European Central Bank (ECB) Chief Economist Philip Lane claims that reversing the bank’s expansive monetary policy would be counterproductive.
Such a move would not help bring rising inflation under control, but would instead have the opposite effect, he stressed, confirming the ECB’s policy stance, Reuters reported on Monday.
The ECB is targeting an inflation rate of 2%, whereas the figure exceeded 4% last month, more than double the target. The bank has come under increased pressure to scrap its expansive monetary policy and to raise interest rates, which remain at record-low levels.
While the ECB insists it will not rethink its policy, markets have nonetheless priced an interest rate hike next year.
Reiterating ECB President Christine Lagarde’s claims, Lane maintained that rising inflation is driven by temporary effects. ECB policies are not effective against inflation right now, he said, while predicting that it would fade on its own.
ECB not budging
“An abrupt tightening of monetary policy today would not lower the currently high inflation rates but would serve to slow down the economy and reduce employment over the next couple of years and thereby reduce medium-term inflation pressure”, Lane asserted.
“Given our assessment that the medium-term inflation trajectory remains below our 2% target, it would be counter-productive to tighten monetary policy at the current juncture.”
Last week, Lagarde and other ranking ECB officials criticised market expectations, claiming that conditions for an interest rate hike would probably not be met next year.
Lane pointed out that keeping a close eye on wages will be important in judging inflation, but he added that even a significant rise in the coming period may also be transitory.
“A one-off shift in the level of wages as part of the adjustment to a transitory unexpected increase in the price level does not imply a trend shift in the path of underlying inflation”, he cautioned.