FRANKFURT May 19 Euro zone inflation may take
longer than expected to rise because of hidden slack in the
labour market, and the European Central Bank should factor this
into its decisions to avoid tightening too fast, board member
Benoit Coeure said on Friday.
But once inflation stabilises at around 2 percent, the ECB
needs to tighten policy even if unemployment remains high, to
avoid the economy running "hot", Coeure said.
Coeure argued that a broader measure of unemployment and
underemployment is twice the headline jobless figure due to
increases in temporary and part-time work, explaining why wage
growth has been weak and doing little to push inflation towards
the ECB's 2 percent goal.
"All this essentially means that it may take longer for
inflation to gain steam and wage pressure might only start to
rise meaningfully once ... those who are still willing to work,
but not currently counted as unemployed, are reabsorbed," he
"Were we to ignore ... that labour market slack may be
larger than is suggested by headline unemployment measures, we
could run the risk of tightening policy prematurely."
Coeure added that if the ECB ignored this hidden slack, it
could choke off growth, needlessly keep people out of work and
fail to raise inflation.
With inflation now well in positive territory, the ECB has
come under pressure from more conservative countries to dial
back stimulus, even as underlying inflation remains weak and
wage growth is muted.
He said structural unemployment, or the proportion of
unemployable workers, has not risen significantly in the past
decade so wage inflation is not seen kicking in at higher
unemployment levels than in the past.
Coeure warned, however, that the ECB would not keep policy
easy just to create jobs.
"Should we reach a point where the path of inflation is
expected to be self-sustaining, but long-term unemployment
remains high, there should be no doubt as to how I would decide
regarding our policy stance," Coeure said in Geneva.
"Monetary policy cannot 'run the economy hot' as insurance
against labour market risks."
(Reporting by Balazs Koranyi and Francesco Canepa; Editing by