LDN - Business

ECB must factor big labor market slack into policy: Coeure

[May 19, 2017] FRANKFURT (Reuters) - Euro zone inflation may take longer than expected to rise because of hidden slack in the labor 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 stabilizes 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 toward 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 said.

"Were we to ignore ... that labor 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.

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Benoit Coeure, board member of the European Central Bank (ECB), is photographed during an interview with Reuters journalists at the ECB headquarters in Frankfurt, Germany, May 17, 2017. Picture taken May 17, 2017. REUTERS/Kai Pfaffenbach

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 labor market risks."

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

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