BRUSSELS: European Central Bank (ECB) executive board member Isabel Schnabel says there’s an increasing threat of inflation taking hold, as she plays down the danger that resurgent coronavirus infections may impede the eurozone’s recovery.

       In an interview in Frankfurt just weeks before a crucial decision on stimulus, the German-born official responsible for market operations went on to suggest that an emergency contingency would still be needed even as the future focus of monetary policy possibly shifts away from asset purchases.

       “It’s plausible to assume that inflation is going to drop below our target of 2% in the medium term. However, the risks to inflation are skewed to the upside,” Schnabel said.

       “Uncertainty has increased with respect to the pace and extent of the decline” and “we have to take this increased uncertainty into account.”

       Her remarks follow months of global investor concern at inflation, and precede data that may show a new peak in the eurozone, with price increases possibly surging close to 6% in Germany, its biggest economy.

       Meanwhile the worsening pandemic there has prompted chancellor Angela Merkel to seek tougher restrictions on activity.

       “Most recently, we are seeing a rise in Covid-19 infections and some containment measures in parts of the eurozone,” Schnabel said.

       “This is likely to have a moderating effect on activity in the short run, in particular in the contact-intensive services sector. But I do not think that this will derail the overall recovery.”

       Perhaps supporting that economic view, purchasing managers indices for France and Germany released yesterday showed improvement in November.

       Input costs surged however, and supply delays as well as inflation pressures are weighing on German growth.

       With such an uncertain economic backdrop, officials should seek to maintain room for manoeuvre in their upcoming decision on Dec 16, she added.

       That meeting has been flagged as pivotal in determining the future of ECB stimulus after its emergency bond-buying measure expires in March. The current surge in consumer prices, partly linked to spiking energy costs and global supply disruptions, has stoked a debate among officials over how long it might last and what that means for moving beyond the €1.85 trillion (US$2.1 trillion or RM8.81 trillion)) crisis asset-purchase programme, known as PEPP.

       “At times of very high uncertainty, it’s extremely important to retain some optionality,” Schnabel said.

       “I certainly wouldn’t pre-commit over a too long period of time. That would be a mistake.”

       She suggested separating the Governing Council’s decision into two questions.

       “The first is: what’s the amount of stimulus that is still needed?” Schnabel said.

       “The second part is: which kind of tools do we want to use in order to provide the stimulus that we find appropriate?”

       The ECB’s flagship pandemic bond-buying programme was launched in the early days of the crisis and did away with many of the restrictions that previously characterised its quantitative easing.

       That was done to stem market fragmentation between different eurozone countries, following a sell-off in securities of highly indebted issuers such as Italy.

       Net purchases under the pandemic program are still expected to end in March, Schnabel said. Asked whether the full envelope will be used, she observed that economists don’t generally expect this will be the case. — Bloomberg