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MNI INTERVIEW: ECB To Look Through Oil Spike - Ex-BdF Official


The European Central Bank would be tempted to look through any small increases in inflation feeding through from energy markets at a time when the economy is slowing and wages pressure easing, a former senior economist at the Bank of France told MNI.

Whether the ECB will hike interest rates again is uncertain, said Eric Monnet, who predicted in May that it would have to raise rates to 4%, adding that economic slowdown means talk of wage-drive inflation is “completely out of date.” (See MNI INTERVIEW: ECB To Hike To 4% - Ex-Bank Of France Economist)

“A lot of what's happening now is kind of a political game,” he said in an interview, “It's more about sending signals to governments and to the markets than taking a precisely calibrated view on what will be the [terminal] rate of interest. It’s difficult to say whether there will be another small increase or not.”

But the ECB will be reluctant to respond to any geopolitically-driven energy price increase, he said.

“The issue is what individual governments and the EU do with energy markets. Maybe there will be a kind of rebalancing,” said Monnet, now an economic historian and macroeconomist at the School for Advanced Studies in the Social Sciences and Paris School of Economics. “The main thing that happened last year was that food prices really caught up. If energy prices rise again then the ECB can say it’s the responsibility of governments to do something about it.” (See MNI SOURCES: ECB Doves Wary Of December Push For Hike)


The ECB’s desire to reduce its EUR7 trillion balance sheet, currently being examined in its operational framework review, is also a political issue, he said.

“Shrinking the balance is always a very complicated issue, although it’s really not an issue of anti-inflationary monetary policy,” Monnet said. “It's an issue of the consequences that it adds on the public budget and on the balance sheet of public banks, so in the end of financial stability.”

The ECB is also likely to be drawn into supporting the green transition, he said.

“For a long time I and many other people have also been advocating for central bank measures to offer lower interest rate loans for green finance,” said Monnet. “I think it's very likely that there will be some measures in this direction, either via fiscal policy, macroprudential policy or even some kind of green TLTRO.”

This will mark a departure from recent free-market orthodoxy, he conceded.

“But we are living in a world where everything is coming back to the idea that governments can target activities and sectors, and I don’t see how central banking is going to avoid it,” he said. “You need to be broad enough in your approach, and not give special advantage to certain companies by being seen as doing green policy only for bond issuers.”

Any upward pressure on inflation from green subsidies could also be offset using macroprudential tools at the national level , Monnet said, with banks' countercyclical capital buffers adjusted so as to counter excessive loan growth.
"This would be a change in the one-size-fits-all policy approach, helping to calibrate the impact of the rise in interest rates to particular national settings."

MNI London Bureau | +44 20 3983 7894 |
MNI London Bureau | +44 20 3983 7894 |

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