Covid Delta variant likely to delay economic recovery – Makhlouf

The Covid-19 Delta variant is likely to delay economic recovery but not significantly change it, according to Gabriel Makhlouf, the governor of the Central Bank.

The recovery was already evident and was supported by monetary and fiscal policy, he said, even if significant uncertainties remained about the long-term changes which would follow the pandemic. These were in train already, he said, and the Delta variant is “more likely to delay recovery than fundamentally change it”.

The vaccination programme was ensuring fewer hospitalisation and ICU cases as a result of infection, he said.

“On the other hand you can’t help feeling uneasy about the growth in the number of cases” in many countries he said, speaking in an interview with The Irish Times, noting the need for more restrictions in Israel, despite high vaccination levels.

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Inflation target

Close attention would also be paid to what happens in the UK, which has taken the “remarkable” decision to lift all restrictions despite high case numbers.

Mr Makhlouf, who sits on the governing council of the European Central Bank, was speaking after a bank council meeting which announced a new strategy, centred on a revised inflation target. While previously the ECB aimed for an inflation rate of "close to, but below, 2 per cent", now it has adopted a 2 per cent target. Mr Makhlouf said that this target was "symmetrical", meaning the ECB will tackle deviations in either direction with the same level of importance.

Analysts have interpreted this as offering the ECB more policy scope heading out of the pandemic. Mr Makhlouf said he does not expect it to change policy in the near term. “For me this is all about achieving clarity,” he said, as interpretations of the old target could vary. A clearer understanding of the target – anchoring expectations of future inflation – could offer the ECB some degree of extra policy flexibility, he said.

The ECB insists that it is not adopting a similar approach to the US Federal Reserve Board, which has said it will allow inflation to overshoot its 2 per cent target for a time to make up for periods when it was well below. “We are not doing what the Fed is doing,” Mr Makhlouf said, “we are not having make-up strategies”.

Exceptional measures

However, he said it was possible that euro zone inflation could rebound over the target level – what he referred to as “ an incidental overshoot” – for a “ transitory” period, given the use of exceptional measures at the moment.

A key difference from the period after the financial crash was that budget policies were also expansionary across the euro zone, he said.

“Monetary policy and fiscal policy working together have played an important role,” he said, saying that it was also important that the EU recovery plan involved some centrally funded additional spending to add to national budgets. “Monetary policy needs friends,” he said.

Elsewhere in its review, the ECB had also recognised the climate agenda by saying that would be a factor in deciding how future asset purchases would be allocated. Meanwhile, work is to start on reflecting house prices in inflation measures used by the bank, though the bank recognised that this was a complicated exercise which would take time.