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Eurozone Growth Risks Unbalanced

Eurozone Growth Risks UnbalancedEurozone Growth Risks Unbalanced

Risks to the eurozone economy are still not balanced and the European Central Bank needs to see evidence that wage pressures are feeding into inflation before it shifts its policy stance, Philip Lane, a member of the bank’s governing council said.

The eurozone economy has been on its best run for a decade and headline inflation has recently met the ECB’s near 2% target, fueling calls from some quarters to start winding down the ECB’s €2.3 trillion ($2.51 trillion) bond-buying stimulus program, Reuters reported.

But Lane told Reuters that there was still some way to go before the central bank can feel comfortable about tweaks to its ultra-easy monetary policy stance.

“There is still downside but the tail risk... is fading and the momentum is back toward balance,” said Lane. “So it is still below balance, but moving toward balance.”

Lane said the “key substantive debate” at the central bank is where inflation is headed over the medium-term given doubts around wage pressures in the bloc. “We need to see evidence that wage inflation is actually on its way to a level consistent with the target,” said Lane.

“The fact we are seeing reasonably good data on output and unemployment, that is nice, it is helpful, but the core of it is how much of it is going to map into sustainable inflation. For underlying inflation to go toward the target, a significant part of that will be: Where is wage inflation going?”

The ECB has committed to buying €60 billion worth of bonds every month until December, despite already facing self-imposed limits in certain countries and to keeping rates at ultra-low levels until well after that.

Sources on and close to the bank’s governing council told Reuters last month that the bank may send a small signal about reducing monetary stimulus at its next meeting in June, while others have said autumn may be a more appropriate time.

Asked about the timeline for future monetary policy decisions, Lane said: “Something has to happen in the rest of this year...” The debate around limits to the bond program was “secondary”, he added.

“Central banks have a range of instruments and I do not think that discussion should deflect from the ability of the ECB to deliver its inflation target. We have the range of instruments that can deliver the inflation target,” said Lane, who is Ireland’s central bank governor.

Lane is spearheading an EU proposal to create synthetic “safe” assets backed by eurozone sovereign bonds that would help break the link between banks and governments that exacerbated the financial crisis.

 

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