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Euro-zone inflation will remain subdued in coming years and won’t turn out “excessively high” even after the current surge in Germany toward 4%, according to European Central Bank Executive Board member Isabel Schnabel.
“This development is temporary,” she said in an interview with the Frankfurter Allgemeine Sonntagszeitung. “Our medium-term inflation projection is subdued: only 1.4% in 2023. Though that is surrounded by uncertainty, I am sure that we will not experience excessively high inflation.”
New ECB Forecasts
Economic output and inflation predictions boosted for 2021 and 2022
Source: European Central Bank
The remarks by Schnabel, the central bank’s official in charge of markets, follows the revelation on Friday that the 2023 forecast she described is perceived widely among Governing Council members as facing “upside risks.” Inflation concerns have prompted counterparts including the U.S. Federal Reserve to discuss dialing back stimulus.
Schnabel, who spoke in an interview to mark the publication of the ECB’s new monetary policy strategy, said that Germany’s current bout of price increases reflects last summer’s temporary reduction in sales taxes, along with supply-chain troubles that resulted from economies quickly reopening and significantly boosting demand.
“Whether inflation rises sustainably ultimately hinges on whether wages also rise and amplify inflation through second-round effects,” Schnabel said. “So far we have seen little evidence of that -- also in Germany.”
‘Minimal’ Shift
As part of the ECB’s new strategy, officials decided to raise the inflation goal to 2%, in a move that Schnabel described as “minimal” compared with the prior target of “below, but close to, 2%.” The institution also agreed that there were circumstances when it could tolerate a moderate and transitory overshoot of that level.
“A target of 2% has an important function: it creates space so that our monetary policy can have its stabilizing effect,” she said. “The new inflation target safeguards our room to maneuver and benefits people.”
It’s important to “firmly anchor” citizens’ inflation expectations close to the ECB’s goal, Schnabel added.
“Moderately higher inflation is a sign of a better economic outlook,” she said. “We have to support this with our monetary policy for as long as it takes to achieve our medium-term inflation target.”
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