ECB on alert as inflation threat lurks

The European Central Bank (ECB) is watching inflation risks closely. Governing Council member Peter Kazimir warns that the path to stable prices is still uncertain despite progress.

The ECB kept interest rates unchanged last week for the second time in a row, showing confidence that inflation is close to its 2% goal but admitting it must stay flexible in a changing global economy.

Kazimir urges the ECB to stay watchful of inflation

Peter Kazimir warned the European Central Bank not to ignore the possibility of rising inflation just because the economy’s progress shows prices are slowly moving closer to its target of 2%. He called the current interest rates “comfortable, neutral territory,” meaning the bank must prepare to react to sudden changes because the global economy remains unpredictable.

Kazimir’s comments come when the ECB’s latest quarterly forecasts showed that inflation will stand at 1.9% in 2027. This is just below the 2% target. While the numbers may seem reassuring, some policymakers warn that the region could be stuck with slower growth and lower confidence if inflation stays below the target for several quarters. This would force companies to change how they charge for their goods and services, force workers to accept smaller wage increases, and weaken the overall economic demand. 

On the other hand, Kazimir insists that if the ECB focuses only on the risk of inflation being too low, it won’t act in time when prices start rising too fast to keep up with.

Even with this ongoing debate, Kazimir said the small and temporary surges in inflation are unavoidable in an open and interconnected economy. For these reasons, the ECB should not change policy every time inflation moves slightly above or below the target. 

He added that reacting to these “small, tiny deviations” would only confuse markets and businesses because people would start to think the ECB can’t tolerate even the most normal variations. Ultimately, the bank would lose its credibility in the long term. 

Kazimir advised the institution to focus on the bigger picture, remain calm when small variations appear, and save its most decisive actions for when the evidence shows a big shift from the 2% target. 

ECB holds steady but keeps all options open

As earlier reported by Cryptopolitan in its last September meeting, the ECB didn’t adjust interest rates. The ECB held its key deposit rate at 2% marking a second consecutive pause, a move markets had already priced in with near certainty.

The last time the ECB adjusted rates was in June, when it finally eased off from last year’s all-time high of 4%. With inflation sitting roughly at target, “around the 2% medium-term target,” as the bank said, there’s no immediate reason to panic.

The decision to hold the rates shows that policymakers are sure their previous efforts to manage inflation were effective. It also displays their confidence that the eurozone economy can handle the current borrowing costs without them making any sudden changes.

ECB President Christine Lagarde and other officials said they will rely entirely on data for monetary policy and hold meetings for every big decision. This means that instead of following a fixed path, the bank can adjust policies whenever new global or regional shocks emerge.

Meanwhile, financial markets remain uncertain about more rate cuts because analysts say the ECB has already done enough and will now wait and watch how the economy reacts. However, even with such a cautious approach, the bank’s leaders keep saying they are in “a good place,” meaning the ECB has enough time to monitor the rates without making quick moves.

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