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ECB’s Kazimir Says Boost to Old Tools Not a Must Post Crisis

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The European Central Bank won’t necessarily have to boost an older bond-buying program when pandemic stimulus is phased out, according to Governing Council member Peter Kazimir.

“Concerns about the cliff effect cannot automatically mean demands for increasing the standard programs,” the Slovak central bank chief said in an interview in Bratislava.

The ECB has proved it can be “extremely flexible” in setting monetary policy in response to extraordinary situations, therefore “there is no automatic formula,” he said. “We’ll be deciding according to conditions at the given time.”

The euro broke through $1.17 after the report and reversed losses incurred earlier on Tuesday. It traded at $1.1697 at 4:26 p.m. Frankfurt time, unchanged on the day.

The ECB’s 1.85 trillion-euro ($2.2 trillion) emergency asset-purchase program is set to end in March 2022, or when officials deem the crisis phase to be over. A weak medium-term inflation outlook and concerns about a rough transition have supported expectations by economists that the ECB would then step up buying under a plan dating back to 2015, which is currently running at 20 billion euros a month.

The pandemic program has been “functioning very well and naturally it is now in the final stage of its life cycle,” Kazimir said. “It’s a special tool designed for a special situation, and it will be phased out when it’s not needed anymore. The market seems to understand that this tool will be terminated with the end of the pandemic.”

ECB officials have set up their December meeting as the moment to decide how to reshape monetary policy to avoid derailing the recovery. Estonian Governing Council member Madis Muller has said increasing the pace of the older program will be considered, though he also said he’s “not sure” it would be the best way forward.

Inflation Risks

ECB President Christine Lagarde said Tuesday that an end to the pandemic emergency “is drawing closer,” adding that the euro area is experiencing a “highly atypical recovery” characterized by rapid growth and supply bottlenecks.

She also reiterated that current price pressures are expected to pass. Inflation accelerated to 3% in August, though it’s projected to slow next year and fall short of the ECB’s 2% target in 2023.

Like other Governing Council members, Kazimir said risks to the inflation outlook are tilted to the upside, with production issues plaguing the manufacturing sector presenting the “key risk” to the baseline forecast.

“If inflation remains elevated next year because of supply bottlenecks, my concern is that it could spill into wage negotiations for the following year as well,” he said. But “we are not seeing this happening in key countries so far.”

Still, he said he’s confident that solutions to these logistical problems will ultimately be found and that their impact on consumer prices won’t be permanent. By contrast, the transition toward a more carbon-neutral economy “will probably have a longer-lasting effect on inflation.”

(Updates with euro reacion in fourth paragraph.)

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