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MNI INTERVIEW2(RPT):  ECB Risks Wrong Inflation Message-Wunsch

MNI (Brussels)

Calling higher inflation transitory may give the impression the ECB does not want to it return to target, the Belgian National Bank's Pierre Wunsch tells MNI.

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The European Central Bank should be careful not to over-emphasise the temporary nature of the recent surge in consumer prices, lest it create the impression that it does not want inflation to return to target, National Bank of Belgium Governor and ECB Governing Council Member Pierre Wunsch told MNI.

"I am little bit concerned about our communications - we have stressed so much that it is temporary that it could create the feeling that we don't actually want to push inflation back to 2%," he said in an interview.

"I do buy the argument that what we see today has a large temporary component. The big question is whether a succession of those shocks, combined with quite a tight labour market, might lead at some point to some second-round effects."

For the moment, patience is required until the outlook for the recovery and inflation become more certain.

"It's not like we have any signs - except directionally - that there are going to be strong second-round effects," he said, although he mentioned anecdotal evidence of emerging pay pressures.

"People are paying more to get the people they want, and to some extent, we would want that, because we want inflation to go to 2%."


While inflation expectations remain contained below the ECB's 2% target, extremely supportive monetary policy could eventually drive a sustained increase in the rate of price growth, he said.

"I don't mean this year or next year, but in the coming years and over our projection horizon, plus one or two years. You have a combination of factors that should contribute positively to inflation: we have a recovery of the economy, which is much stronger [than expected], you have supply constraints, you have energy prices going up, you have pent-up demand, you have NextGenerationEU, and you have the climate challenge," he said.

Wunsch confirmed he dissented from the ECB's new forward guidance in July, which committed it to keep rates at present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon. The ECB also wants to be confident that underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term.

"The forward guidance implies rates stay at present, negative, levels for several years if inflation does not pick up," he said, "as the cost benefit analysis of very easy monetary policy can evolve over time, I think that is an element we should have accounted for in our formulation."