Risks to the euro zone economy are still not balanced and the European Central Bank needs to see evidence that wage pressures are feeding into inflation before it shifts its policy stance, governing council member Philip Lane said.
The euro zone economy has been on its best run for a decade and headline inflation has recently met the ECB’s near 2 percent target, fuelling calls from some quarters to start winding down the ECB’s 2.3 trillion euro (£1.94 trillion) bond-buying stimulus programme.
But Lane told Reuters that there was still some way to go before the central bank can feel comfortable about tweaks to its ultra-easy monetary policy stance.
“There is still downside but the tail risk… is fading and the momentum is back towards balance,” said Lane. “So still below balance but moving towards balance.”
Lane said the “key substantive debate” at the central bank is where inflation is headed over the medium-term given doubts around wage pressures in the bloc.
“We need to see evidence that wage inflation is actually on its way to a level consistent with the target,” said Lane.
“The fact we are seeing reasonably good data on output and unemployment, that is nice, it is helpful, but the core of it is how much of it is going to map into sustainable inflation.
“For underlying inflation to go towards target, a significant part of that will be: where is wage inflation going?”
The ECB has committed to buying 60 billion euros worth of bonds every month until December, despite already facing self-imposed limits in certain countries, and to keeping rates at ultra-low levels until well after that.
Sources on and close to the bank’s Governing Council told Reuters last month that the bank may send a small signal about reducing monetary stimulus at its next meeting in June, while others have said autumn may be a more appropriate time.
Asked about the timeline for future monetary policy decisions, Lane said: “Something has to happen in the rest of this year given there needs to be a plan in 2018.” The debate around limits to the bond programme was “secondary”, he added.
“Central banks have a range of instruments and I don’t think that discussion should deflect from the ability of the ECB to deliver its inflation target. We have the range of instruments that can deliver the inflation target,” said Lane, who is Ireland’s central bank governor.
Lane is spearheading a European Union proposal to create synthetic “safe” assets backed by euro zone sovereign bonds that would help break the link between banks and governments that exacerbated the financial crisis.
It is designed to provide banks with a safe asset to use as collateral so they can reduce their exposure to their own governments’ debt.
But Germany has already criticised the idea and it remains uncertain whether the European Commission will reference in its paper on the future of the euro zone at the end of the month.
“The task force is making good progress but it is purely a technical exercise. There are a wider set of issues in thinking about the potential role of these instruments in the wider European architecture,” said Lane.
“The European Commission paper and the views of various national authorities will evaluate this idea in the context about every other idea about the future of the euro zone. I hope it will be a helpful ingredient for the European system to think about how to make the euro area more robust in the future.”