The governor of the Central Bank has said risks in the eurozone are receding but caution and vigilance should still remain.
Philip Lane, who is also an ECB governing council member, said risks to the eurozone economy are still not balanced and the ECB needs to see evidence that wage pressures are feeding into inflation before it shifts its policy stance.
“There is still downside but the tail risk ... is fading and the momentum is back towards balance. So still below balance but moving towards balance,” he said.
The eurozone economy has been on its best run for a decade and headline inflation has recently met the ECB’s near 2% target, fuelling calls from some quarters to start winding down the ECB’s €2.3tn bond-buying stimulus programme.
Mr Lane said the key debate at the Central Bank is where inflation is headed over the medium-term given doubts around wage pressures in the bloc.
“We need to see evidence that wage inflation is actually on its way to a level consistent with the target. The fact we are seeing reasonably good data on output and unemployment, that is nice, it is helpful, but the core of it is how much of it is going to map into sustainable inflation. For underlying inflation to go towards target, a significant part of that will be: where is wage inflation going?” he said.
Mr Lane denied Ireland was being overly cautious in relation to regulation, saying regulators across the EU are broadly seeking to apply the same rules in each country, and it wasn’t “accurate whatsoever” to say Ireland was being overly cautious.
Addressing the ACI World Congress in Dublin, Mr Lane said the external value of the euro has been broadly stable since mid-2015, meaning the recovery in the eurozone has also benefited the rest of the world through positive trade linkages.
He said the last 15 years illustrated the importance of global factors in determining financial conditions.
“During 2003-2007, easy credit conditions and a risk-on attitude pervaded the financial systems of advanced economies, which was reinforced by the international reallocation of liquidity across regions. In turn, this period was followed by the sudden stop of the global financial crisis during 2008-2009,” he said.
He said since 2010 there has been more diversity in financial conditions across the globe, which he said was due to differences in speed of recovery from the crisis, the state of balance sheets and variation in policy decisions.
“Under these conditions, there is greater potential for adverse external policy spillovers since countries are at different points in the tightening-loosening policy spectrum,” he said.
He said the scale of trade and financial integration has trended up over the last 20 years, so that the potential scale of external and internal spillovers are quantitatively larger today than in the past. n Additional reporting Bloomberg and Reuters
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