The ECB president said the council had done “a lot of soul searching” to test its hypothesis that inflation would subside next year, and his analysis “did not support” market expectations for a hike. rates before the end of 2022.
Nonetheless, even as Lagarde spoke on Thursday, investors increased their bets on an ECB rate hike. Markets are currently anticipating an increase of 0.1 percentage point by September of next year.
“The market opinion is that central banks are lagging behind,” said Antoine Bouvet, ING rate strategist. “The ECB is no exception.
The ECB’s approach to rising inflation – which in October reached a peak of 4.6% in 28 years in Germany and a peak of 5.5% in Spain in 37 years – contrasts with other major central banks such as the Bank of England and the Bank of England. US Federal Reserve, both of which have signaled moves towards tightening policy.
Instead, after a two-day meeting of its Governing Council, the ECB said its € 1.85 billion Pandemic Emergency Purchase Program (PEPP) would continue, although ‘at “a moderately slower rate” than the level of 80 billion euros per month at which it was operating. until last month. The ECB also kept its deposit rate unchanged at minus 0.5 percent.
The ECB president dismissed fears of ‘stagflation’ and said the euro area economy was still recovering strongly, although it had recently lost momentum due to supply chain issues and the soaring energy prices. She said: “We expect inflation to rise further in the short term, but then decline over the next year. “
However, in a subtle change from previous statements, Lagarde said inflation would “take longer to come down than initially expected”, adding that supply chain bottlenecks would likely last until l next year, although she expressed confidence that she would fall below the ECB’s 2 percent. target of cents by 2023.
Economists expect eurozone inflation to hit 3.7% this month, its highest level since 2008. Some are also starting to predict that it could stay above the target of the ECB next year.
Neville Hill, chief European economist at Credit Suisse, said the ECB president was “only half persuasive in pushing back market pricing to higher rates next year.”
Highlighting rising inflationary pressures in Europe, EU companies’ selling price expectations hit an all-time high in October, according to the European Commission’s latest monthly survey, while consumer price expectations rose. reached their highest level since November 1992.
The ECB adopted a new strategy earlier this year designed to avoid the risk of raising rates too soon – something it was widely seen to have done just as the eurozone debt crisis began in 2011 and it raised rates twice during a food and energy supply shock. .
Konstantin Veit, portfolio manager at Pimco, said: “The failure of President Lagarde to appease the markets probably contains an element of the markets calling into question the ECB’s commitment to the new monetary policy strategy. . “
Some central banks have acted forcefully in the face of rising inflation. The Bank of Canada rocked the markets on Wednesday saying it would stop asset purchases and raise rates sooner than expected. Brazil’s central bank also raised rates by 175 basis points, its biggest move in nearly 20 years.
“The danger for central banks is that inflation expectations are no longer anchored,” said Randall Kroszner, professor at the University of Chicago business school and former Fed governor. “The ECB seems ready to be more patient. ”
Lagarde said she expected the PEPP to end in March, adding that the decision whether or not to extend an earlier asset purchase program to make up for part of the reduction would only be made. December.
The 1.41 billion euros already spent under the PEPP since its launch in response to the Covid-19 crisis last year brought the overall portfolio of the ECB’s assets to 4.5 billion euros and allowed it to exceed a self-imposed limit to hold only a third of any country’s eligible sovereign debt.
There should be divisions within the ECB council on how much of this flexibility should be preserved under the ongoing asset purchase program, which is expected to be increased from its current pace of $ 20 billion. euros per month.
When Jens Weidmann announced last week that he would step down as head of Germany’s central bank at the end of the year, he warned in a letter to Bundesbank staff: “The crisis measures, with their extraordinary flexibility, are only proportionate in the emergency situation for which they were created.