Sleijpen Says ECB Can Tolerate Small Inflation Overshoot

Olaf Sleijpen, the governor of the central bank of the Netherlands, stated that the recent spike in energy prices has not yet shifted the European Central Bank (ECB) from its current policy path. Despite the geopolitical tensions involving Israel and Iran, Sleijpen believes the bank remains in a stable position to manage economic pressures. The surge in Brent Crude Oil and natural gas prices this week has raised concerns regarding inflation expectations. Some market observers fear the ECB might need to tighten policy further to prevent price growth from becoming entrenched. However, Sleijpen noted that the bank could tolerate a modest and temporary overshoot of its 2% inflation target, maintaining a symmetrical approach to price stability.

\"We should be consistent and we are symmetrical.\"

Before the recent conflict broke out, Sleijpen had described the environment of low inflation and neutral rates as a central banker's nirvana. While he has adjusted his terminology, his underlying assessment of the euro zone's economic standing remains largely positive. Even if policy remains unchanged at the upcoming March 19 meeting, he argued that the ECB should discuss sensitivity analysis and alternative scenarios to prepare for further volatility.

\"While I would not use the word nirvana or Goldilocks anymore, I haven't dramatically changed my view on where we are, which is still a good place.\"

The governor argued that while the ECB has learned from the inflation surge of 2021 and 2022, direct parallels to the current situation are limited. Monetary and fiscal policies are currently more restrictive than they were during the previous shock, providing a different buffer for the economy. He emphasized that the bank must remain vigilant regarding supply-side shocks, which are notoriously difficult to manage from a monetary perspective.

\"One of the lessons of that period is that we need to be aware of the risks around supply side shocks.\"

Sleijpen also addressed the ECB's relationship with international counterparts, specifically the United States Federal Reserve. He expressed high confidence in the Fed's commitment to providing dollar liquidity during crises and noted that there is no intention to move the Dutch central bank's Gold reserves from their current storage in New York. He pushed back against arguments that the ECB should reduce its reliance on Washington due to unpredictable economic policies.

\"I have a lot of trust in our relationship with the Fed's current leadership when it comes to this particular arrangement, and I also have similar trust in its future leadership.\"