ECB must watch surge in inflation expectations -de Guindos

FRANKFURT (Reuters) – The European Central Bank needs to keep a close eye on the recent rise in inflation expectations above its 2% target but wage growth, a key requirement of durable inflation, is still muted, ECB Vice President Luis de Guindos said on Thursday.

Inflation rose to 7.4% last month, and while a quick retreat is expected in the second half of the year, there are growing concerns that some inflation will linger beyond the current crisis, keeping price growth over 2% in the years to come.

“Inflation expectations have been rising in recent months though and initial signs of above-target revisions in those measures warrant close monitoring,” de Guindos told a European Parliament committee.

However, there are no signs that high consumer price growth is seeping into wage-setting dynamics, a potentially worrisome sign that would suggest lingering inflation.

“So far wage increases are quite prudent and fully compatible with the target of price stability,” de Guindos said.

With price growth likely to stay high for longer, the ECB will continue to “normalise” policy, first ending bond buys, then considering rate increases, de Guindos said, repeating the ECB’s standing guidance.

This could raise the risk of a sharp rise in yields but the ECB is ready to contain an unwarranted widening of the spreads between the debt instruments of the bloc’s core and periphery, de Guindos added.

“We have discussed the general implications of fragmentation,” he said. “We have not discussed any concrete instruments… but I can assure you that we are ready to act.”

(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Catherine Evans)