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MNI INTERVIEW:Covid Adds To Price Pressures-Malta's Scicluna

MNI (Frankfurt)

A longer pandemic may skew eurozone inflation risks to the upside, the governor of the Central Bank of Malta tells MNI.

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Upside risks to the eurozone inflation outlook will continue to build so long as the Covid pandemic persists, the governor of the Central Bank of Malta told MNI in an interview, in which he also called for the European Central Bank to avoid any abrupt reduction in monetary stimulus in March.

While the jump in eurozone inflation, which hit 4.9% in November amid global supply chain disruption caused by the pandemic, will be transitory, it will last longer than previously anticipated, Edward Scicluna said on Thursday, one day after the omicron variety of Covid was reported to the World Health Organisation.

“The longer it continues, the bigger the chances that they might feed into the secondary effects, such as inflationary expectations, of household, corporations and wage demands,” Scicluna said.

“I believe the [inflation] risks are upside risks.”

But inflation is still likely to be anchored around 2%, but no higher, by the end of the current forecast horizon, with little sign yet of a sustained rise in heightened price expectations, he said.

“Of course, people are alarmed at seeing inflation at 4%, but I don't think we have yet any indication that it has really seeped through, that it has changed their conviction. I think we still have to wait a bit to see whether that happens, because that is, after all, the real inflationary pressure,” he said, though he added that the pandemic was stretching ECB models and making forecasting more difficult.

The unemployment rate has become less useful as a guide to economic slack, in the context of labour shortages as some workers opt out of employment, he noted.

“Could they be incentivised to come back? Definitely. But they are still subject to a degree of shock. If these were to come back slowly, gradually, it's very difficult to be categorical about wage inflation.”


Scicluna said the ECB should end the net purchase phase of its pandemic emergency support programme as scheduled in March 2022, but should avoid any cliff-edge effects from the withdrawal of stimulus by using a more flexible asset purchase facility than the older asset purchase programme, which should also remain in place.

The ECB will face calls to tighten monetary policy in line with other major central banks, he said, though he was sceptical as to whether this would happen before 2024.

“I wouldn't think so,” he said. “I wouldn't say so categorically, but we haven't reached that stage for sure.”

He added: “Definitely there will be pressure, because your reputation is at stake despite being convinced of what you are saying.”

While higher inflation has emboldened more hawkish ECB officials to argue for a smaller stimulus from March (see MNI SOURCES: Hawks Emboldened As ECB Nears Crunch December), Scicluna insisted that the December meeting of the Governing Council is not even the beginning of the end of the expansionary monetary policy linked directly to the Covid crisis, though it will discuss whether to cut the pace of PEPP purchases between now and March.

“We simply call it calibration. We didn't want to point towards something which has a beginning and an end, as far as tapering is concerned. But as for stopping [PEPP] purchasing in March next year, that was a commitment, and I think we should keep it,” he said.

Lockdowns as strict as that imposed in Austria earlier this month are unlikely to be replicated across the continent, Scicluna said, and so are unlikely to have a major scarring effect on the growth outlook.