Benoit Coeure is burnishing his newly found hawkish credentials at the European Central Bank.
The executive board member was a key architect of euro-area quantitative easing when the currency bloc was facing deflation. But in recent weeks he’s been suggesting that the time may be nigh when bond-buying has to stop as price pressures finally build, and he elaborated on that point on Friday at the World Economic Forum.
“We are now at the point where we are starting to see wages ticking up in a very tentative way, also core inflation ticking up in a very limited way in the Eurozone,” he said on a panel session in Davos, Switzerland. “We might be exactly at this tipping point where the Phillips curve is steepening.”
The Phillips curve describes an inverse relationship between joblessness and wages, with a close link to inflation. As unemployment drops, tight labour markets should lead to higher pay that in turn pushes up consumer prices — which is just what the ECB’s massive stimulus is intended to achieve.
The continued failure of wages and prices to gain traction despite the lowest jobless rate since the the depths of the financial crisis in 2009 has raised concern that the curve may be far flatter than normal. That could still be a problem in countries such as France or Italy, but Germany and Netherlands are already close to full employment, Coeure said.
“It’s happening at different paces across the region, but we are moving to the point where we see wages going up,” he said.
ECB President Mario Draghi said on Thursday that policy makers are more confident that inflation will pick up, though he also cautioned that the central bank needs to continue providing stimulus. He also said the risk of inflation suddenly picking up too quickly remains very low because of the amount of slack in the economy and large amounts of debt that continue to weigh on aggregate demand.
