By Balazs Koranyi and Francesco Canepa
FRANKFURT – European Central Bank policymakers meeting last week sought a greater acknowledgement of inflation risks but were rebuffed by the bank’s chief economist Philip Lane in an unusually robust debate, sources close to the debate told Reuters.
Central banks around the globe including the U.S. Federal Reserve have acknowledged that inflation may be more stubborn and persistent than once thought, but the ECB has stuck with its narrative that price growth will slip back below the target level on its own in late 2022.
In what was described as a robust and tense meeting, a significant number of policymakers questioned the quality of the ECB’s projections, pointing to their checkered track record, and argued that inflation was at risk of ending next year higher than the ECB’s expectation.
“Quite a few wanted to acknowledge the upside risks but Philip (Lane) pushed back hard,” one of the sources said. “After a lengthy debate we appeared to agree on a ‘small upside risks’, but even that was nowhere to be found in the statement.”
The closest ECB President Christine Lagarde came to such an acknowledgement was when she said “there is possibly an upside risk” in response to a reporter’s question.
“The statement didn’t quite give back the flavour of our debate,” a second source said.
Even as Lagarde sought consensus, four policymakers opposed the ECB’s package of measures that dialled back but extended stimulus.
Germany’s Jens Weidmann, Luxembourg’s Gaston Reinesch and Austria’s Robert Holzmann voted against the measures while Belgium’s Pierre Wunsch, who did not have voting rights, also expressed his opposition.
Spokespeople for the ECB and the central banks of Austria, Belgium, Germany and Luxembourg declined to comment.
Inflation surged to 4.9% last month, the highest on record for the 19-country currency bloc and more than twice the ECB’s 2% target. It will likely hover close to this in the coming months but the ECB sees it back at 1.9% by the fourth quarter of 2022.
The sources said that several people questioned the quality of the ECB’s forecasts, which have been subject to large revisions for years, and that staff models appear little equipped to calculate with the pandemic’s once-in-a-lifetime shock.
Indeed, the bank’s 2022 inflation projection was nearly doubled to 3.2% last week, but projections further out were raised only modestly with price growth seen below target in both 2023 and 2024.
“It was not the friendliest discussion,” another source said. “It was quite heated at times and dissenters came under personal pressure to join the majority.”
Policymakers appeared especially bothered by the inherent tendency of the models to revert to the long-running average as the economy is likely to undergo a fundamental change in the post-pandemic years.
Since Thursday’s policy meeting, the central bank governors of Germany, Portugal and Lithuania all warned in public that inflation was at risk of exceeding the ECB’s projection.
Policymakers who voted against the package were also unhappy with the length of the ECB’s commitment, including its pledge to reinvest cash from maturing bonds through 2024.
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
