BRUSSELS/FRANKFURT/PARIS (Alliance News) – The European Central Bank may be forced to tighten policy once inflation is perceived to be on a self-sustaining path despite high unemployment, ECB Executive Board member Benoit Coeure said Friday.
“Monetary policy cannot “run the economy hot” as insurance against labor market risks – that is, the risk that long-term unemployment becomes structural unemployment,” Coeure said in a speech in Geneva, Switzerland.
“This would be neither desirable in view of our primary mandate, nor efficient given the euro area circumstances.”
The policymaker expressed confidence that the ECB’s ultra-loose monetary policy will have the desired impact, meaning bringing inflation to its target of ‘below, but close to 2%’ on a sustainable basis.
Coeure pointed out that the share of full-time employment in the recent labor market recovery has declined. Of the net employment created since the 2007-08 financial crisis, around a third has been for workers on temporary contracts, and around a quarter part-time, he added, citing official data.
Consequently, the pressure on wage inflation is less and explains why core inflation is failing to pick up momentum, the policymaker said.
“All this essentially means that it may take longer for inflation to gain steam and wage pressure might only start to rise meaningfully once adjustments in the “intensive margin” take hold – that is, once those who want to work more hours also succeed in doing so and once those who are still willing to work, but not currently counted as unemployed, are reabsorbed,” Coeure said.
The rate-setter also said that the labor market slack may be larger than estimated and has “an important bearing” on the ECB’s policy stance.
“Were we to ignore the facts…that labor market slack may be larger than is suggested by headline unemployment measures, we could run the risk of tightening policy prematurely,” he warned.
Copyright RTT News/dpa-AFX