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Euro zone inflation is at risk of overshooting projections so the European Central Bank needs to carefully monitor price growth and should end its emergency stimulus programme next March, ECB policymaker Bostjan Vasle told Reuters.

Inflation has surged above the ECB’s target due to a long list of one-off factors, leading to fears that what was once considered a temporary price rise could become more permanent through higher wages and corporate pricing structures.

“There are early signs that in parts of the economy and certain regions, the risk regarding the labour market could become more material,” Vasle, a conservative member of the ECB’s Governing Council, said in an interview.

“In some parts of the economy, labour is in short supply and if this trend will continue, or spread to other sectors, it could pose a risk to inflation,” Vasle said. “That’s why I think we should be very careful about second round effects.”

While there is no hard data yet, anecdotal evidence from businesses indicates that labour shortages are becoming more pronounced and workers are demanding higher wages, Vasle added.

Fearing that the COVID-19 pandemic-induced recession would lead to a self-reinforcing deflation spiral, the ECB unleashed unprecedented stimulus last year to prop up the euro zone economy.

Although the 19-country bloc has now recovered nearly all of the lost output, the ECB has yet to dial back support significantly, even as other central banks have either started to tighten policy or signalled imminent moves.

The ECB will need to decide in December whether to wind down its 1.85 trillion euro Pandemic Emergency Purchase Programme and Vasle joined a growing chorus of policymakers backing its end.

“If these trends continue, then in next March it will be appropriate to end PEPP, as announced when the programme was implemented,” Vasle said.

“It’s also important to emphasize that even when we decide to end it, we’ll continue to provide plenty of liquidity to the economy with our other instruments.”

For the Q&A of this interview, click on

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With inflation on the rise, markets are now pricing in an ECB interest rate hike before the end of next year, an aggressive stance that appears out of sync with the ECB’s interest rate guidance.

Vasle downplayed the significance of market-based rate expectations.

“I think we made clear what our intentions are and what will be the most important developments that will influence our decisions,” he said. “So, at the moment, I wouldn’t put too much emphasis on this shift.”

He also dismissed concerns about a recent rise in government bond yields, arguing that real, or inflation-adjusted, financing conditions remain favourable as defined by the ECB.

Vasle would not be drawn on whether the ECB should top up other instruments to compensate for lost asset purchase volumes but argued that the central bank cannot maintain all of the flexibility embedded in the emergency scheme.

“I’m not against a discussion regarding additional flexibility to our existing instruments,” Vasle added. “But I’d like to stress that in normal times, this sort of extraordinary flexibility would not be warranted.”

The ECB currently permits itself to buy up to a third of each member country’s debt and must buy broadly in line with the size of each economy, rules that may be up for discussion at its Dec. 16 meeting. Policymakers will also meet next week, when no change in policy is likely.

But increasing the share of supranational debt in the ECB’s portfolio appears an easier move.

“This would be a natural proposal and I expect it to be part of our discussion,” Vasle said. (Editing by Catherine Evans)