MNI INTERVIEW: 'No Urgency' For ECB To Tighten - Gerlach

The European Central Bank has decided that it is better to be late than wrong in implementing a policy response to surging energy prices, with little hard evidence so far that the shock has spread into underlying inflation, former Central Bank of Ireland deputy governor Stefan Gerlach told MNI.

 "If the conflict eases and energy prices fall back, an early rate increase could quickly need to be reversed and risk being seen as a policy mistake,” said Gerlach, now chief economist at EFG Bank, adding that there are clear risks to both prices and output.

"The shock is stagflationary. It is pushing up inflation while weakening activity by squeezing real incomes and demand. Tightening policy into that mix would risk deepening the slowdown," he said in emailed comments. (See MNI BRIEF: No Signs Yet Of Second-Round Inflation - Lagarde)

CREDIBILITY

Credibility considerations cut both ways for the Governing Council, he said. 

"The experience of 2021–22 argues for acting early to prevent expectations from drifting. But the ECB judged that risk to be smaller than the risk of tightening prematurely under high uncertainty," he said.

The Governing Council's message is conditional, Gerlach added: "The ECB is not comfortable, it is waiting. If inflation proves more persistent or begins to affect wages and expectations, the bar to tighten will fall quickly".

Speaking at the ECB's press conference after the policy meeting, President Christine Lagarde said " And you might argue that we, learning from history, will want to stay away from the risk of being too early … to reference to 2011 and the risk of being a little bit too late. And that's what some of you would characterise for 2022.”