Donohoe says inflation pressure in Europe likely to be temporary

Inflation pressure in Europe is still likely to be temporary, eurogroup president and Minister for Finance Paschal Donohoe said on Monday, even if it is taking longer than expected for it to slow.

“When we move into 2022 I do expect us to be on average back at about 2 per cent,” said Mr Donohoe, who chairs meetings of the euro-area finance ministers, in a Bloomberg TV interview. “But it is clearly taking a little longer to get to that point.”

Mr Donohoe’s comments echo those of European Central Bank (ECB) president Christine Lagarde. She and her colleagues have insisted that soaring prices are fuelled by temporary factors, such as energy costs, that will soon start to fade. In contrast, US Federal Reserve chair Jerome Powell enacted a hawkish pivot last week, suggesting the word “transitory” should no longer be used to describe what is happening.

While the Omicron variant of the coronavirus was “a concern”, Mr Donohoe said he remained confident in the euro-area economies. Any decision on when to phase out the current supplemental spending aimed at boosting the economies “is completely contingent on where we are with the disease”, he said.

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Euro-zone governments should continue to spend to support the Covid-19 economic recovery, though in an increasingly focused way, and consolidate public finances only when it is firmly under way, the International Monetary Fund said.

In a regular report on the euro-zone economy presented to the group’s finance ministers, the IMF noted, however, that while consolidation itself could wait, a credible way of how it would be done in the future should be announced now.

“Policies should remain accommodative but become increasingly targeted, with a focus on mitigating potential rises in inequality and poverty,” the IMF said.

“Fiscal policy space should be rebuilt once the expansion is firmly under way, but credible medium-term consolidation plans should be announced now.”

Wages

The IMF also noted that the rise in inflation, which hit a record high of 4.9 per cent on a year-on-year basis in November, was temporary and therefore not a big threat because it did not translate into a spike in wages, called a second-round effect.

“Recent inflation readings have surprised on the upside, but much of the increase still appears transitory, with large second-round effects unlikely,” the report said, adding that the ECB’s monetary policy should therefore continue to be accommodative.

“Structural reforms and high-impact investment, including in climate-friendly infrastructure and digitalisation, remain crucial to enhancing resilience and boosting potential growth,” the IMF said. – Bloomberg and Reuters