Lietuvos bankas

Lietuvos banko valdybos pirminininko Gedimino Šimkaus interviu finansų portalui „Econostream Media“ apie Specialiąją pandeminę pirkimų programą (PEPP) ir kitus pinigų politikos klausimus.

Q: Governor, how much of a change does the latest decision represent?
A: Let me begin by saying that reaching an agreement between 25 different people is already a challenge. Reaching an agreement between 25 different economists is even harder. What we can be really proud of and what gives us a lot of credibility is the unanimous agreement reached on the monetary policy strategy review. This same spirit prevailed at this monetary policy meeting, where we discussed forward guidance. Each of us on the Governing Council has his own line of thinking, but again, the agreement achieved was by overwhelming majority, and this gives a lot of credibility to the forward guidance. That is crucial, because this guidance is the main indication of our monetary policy intentions based on the assessment of the economy and should therefore give people a clear message about where we’re going. The formulation that we will keep interest rates at their present level or lower until we see inflation reaching 2% well ahead of the projection horizon and, what’s very important, for the rest of the projection horizon, gives us a lot of credibility that our monetary policy will be patient and persistent, and will not over-react to temporary factors. So, to the question you were going to ask about whether I see a risk of the ECB falling behind the curve and needing to correct course sharply, the answer is no. I think in particular the possibility to overshoot the symmetrical inflation target of 2% temporarily and moderately is a very important and credible confirmation of our understanding that we need to act patiently, timely and then bravely. With the overall aim to have inflation at 2% over the medium term.

Our monetary policy is guided of course by the objective of price stability. And here what needs to be mentioned is that whether we look at inflation projections produced by the Eurosystem, based on financial markets or based on surveys, they all point to inflation levels at the end of 2023 well below target. So, we should remain patient, we should remain persistent in order to have inflation converging to the target. We shouldn’t over-react. I understand that some people may think that we may get behind the curve, but our new and clearly symmetric inflation target, with negative and positive deviations from the target equally undesirable and with the possibility to overshoot, even if on a transitory and moderate basis, will actually help us avoid sharp corrections.

Q: What’s your personal view of the 2023 headline inflation projection of 1.4% and the risks?
A: The inflation outlook has improved, but various sources of information all confirm that over the medium term, headline inflation falls below our target. I understand that there are many temporary, short-term factors affecting inflation, but what really matters for the medium to long term is how wages evolve. And in the euro area, we still have quite high unemployment and wages are not growing fast. Therefore, even if we see a pick-up in inflation this year, my view is that it’s transitory and inflation will fall back below 2%. Regarding the projections, they are made on the basis of the information available at the time of the projection exercise. I know that the Eurosystem staff is doing their best to ensure as accurate projections as possible. What we shouldn’t forget is that projections are subject to uncertainty and error, so although typically presented as a point value, they could be viewed as actually distributions of points with different probabilities. In the current environment of high uncertainty, even with the containment measures being lifted in most euro area countries and with the economic rebound from the second quarter, there are doubts. We have now this delta variant, which on the one hand seems quite contagious and on the other doesn’t seem that harmful. So we have fewer hospitalizations and fewer deaths. But this is only delta. What I’m not sure about is whether we’re going to have another Greek letter variant later this year. That’s one thing. Another thing, judging from the experience of Lithuania, is that we have an increasing number of vaccinated people - which makes us more optimistic about our resistance to the virus - but we are also seeing a decreasing pace of vaccinations. Some countries have achieved herd immunity, but in other countries the pace is decelerating. So the question becomes: what measures will be taken by governments if the delta or another variant spreads. This brings a lot of uncertainty. And another issue is the disruption of supply chains that we see at the moment. So even if we have economic growth, uncertainty remains elevated. And I’m saying all this because the Eurosystem staff does their best to project growth and inflation in this environment of uncertainty. I think it’s quite natural that we revise the projections. What’s important is that we understand that uncertainty is high and that the distribution of potential outcomes starts out wide and then shrinks over time.

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