ECB: Inflation Will Move Closer to the Bank’s Target


ECBThe European Central Bank’s chief economist Philip Lane stated that rising labor costs will eventually affect the Eurozone inflation levels moving it closer to the bank’s 2 percent target.

“The fraction of the price level which is most likely to be influenced by wage pressures is moving closer toward the target,” said Lane during an interview with the Financial Times, “There cannot be a permanent disconnect between labor costs and prices,” he added.

The European Central bank has been struggling to keep the Eurozone inflation levels close to 2 percent, which has put into question the effectiveness of its monetary policy decisions. The bank has been trying to increase the money supply by keeping exceptionally low cash rates (the Eurozone’s cash rates are currently on negative territory), as well as implementing massive bond purchases and offering very cheap loans to private banks.

Compared to the Federal Reserve the Bank’s attempts to keep the inflation levels stable have been a failure. Many attribute this to the fact that the US federal reserve has a fiscal support that the Eurozone doesn’t have, hence the continuous callings for a unified fiscal framework for the Eurozone from the ECB leadership.

“Clearly, we are closer to the lower bound than the Federal Reserve is,” said Lane regarding the effectiveness of the ECB’s policy compared with the Federal Reserve’s, “We are closer to it than we would like to be,” he added.

The bank, which is under Christine Lagarde’s mandate, is currently reviewing its monetary policy stance. Many have suggested changing the current inflation target.

Lane also added that the bank is considering taking into account the housing markets in terms of its inflation measures.

“We at the ECB would agree that there should be more weight on housing – but there is a difficulty and this has been looked at several times before,” he explained, “I do not want to pre-empt the review by saying that that is what we are necessarily going to conclude. It is a real issue and we have to be practical about it,” he added.

Lane also explained that at the end of the day the main factor behind the inflation expectations is inflation itself.

“In the end, I share the view of many that the most important influence on expectations is actual inflation,” he continued, “Unless we get actual inflation up, we can talk as much as we like and communicate as much as we like, but in the absence of evidence that inflation is moving up, then many people will ignore the central bank’s communication,” he added.

By 10:45 GMT the Euro went down against the US dollar by 0.22 percent, at 1.1069.

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