ECB officials see faster inflation risk days after new forecast

Bloomberg

European Central Bank (ECB) policy makers signalled they see euro-area inflation potentially exceeding forecasts as economy recovers and supply bottlenecks drive up input prices.
The comments by three Governing Council members point to a more heated debate about the central bank’s current ultra-loose policy, with the pandemic-era bond-buying program set to
expire by March next year.
Their remarks will also raise questions whether the staff projections that were only updated last week underestimated the potential of more persistent price pressures.
“If Covid-19 does not surprise on the negative side, there is some upside for the inflation outlook over the medium term,” Governing Council member Martins Kazaks told Bloomberg in an interview.
The region is now enduring the fastest price increases in a decade, with a rate of 3%. President Christine Lagarde has highlighted that this spike is largely transitory, and the forecasts show inflation will average 2.2% this year and slow to 1.5% by 2023. The ECB has an inflation target of 2%.
Gabriel Makhlouf, who heads the Irish central bank, said some policy makers already “believe that actually, the forecasts are too pessimistic.”
“Some of us do believe that at the moment, the forecast of reaching inflation of 1.5% in 2023 is too low,” he said.
Vice President Luis de Guindos has adopted a similar stance, saying in a newspaper interview published on the same day that the fraying of global supply chains may push inflation higher than anticipated this year.
He also said officials will pay a close attention to wage negotiations to see if price increases will spill into higher salaries, making inflation more entrenched than currently expected.
“So far we have seen few wage rises on the back of the higher prices,” he said. “That may change in the autumn.”
European government bonds remained under pressure last week, with the yield on 10-year Italian debt rising 3 basis points to 0.72%. The ECB, however, quashed a Financial Times report that said Chief Economist Philip Lane told analysts privately
officials expect to reach the 2% inflation target by 2025.