time for the transitional retirement – .

time for the transitional retirement – .

Christine Lagarde (R), President of the European Central Bank (ECB), and Vice-President Luis de Guindos (L)
Thomas Lohnes | Getty Images News | Getty Images
Federal Reserve Chairman Jerome Powell surprised market participants earlier this week by changing his tone on inflation. Today, European economists say the European Central Bank must do the same.
Powell told US lawmakers that “now is probably a good time to take that (transitional) word out and try to make it clearer what we mean” when we talk about inflation.

Rising consumer prices are a growing concern for financial markets. Inflation has reached levels above central bank targets and fund managers are skeptical about whether accommodative monetary policy is the right approach. This is no exception in the euro area.

“Transient suggests we don’t need to worry about it. But we don’t know if we should be worried, ”George Buckley, chief UK and eurozone economist at Nomura told CNBC on Wednesday.

He suggested that it remains unclear whether higher inflation in the eurozone will leave a more permanent mark on the economy.

Data released on Tuesday showed inflation to hit an all-time high in the 19-member bloc at 4.9% in November. The ECB’s policy is to aim for 2% inflation in the medium term.

So far, the central bank has said it expects inflation to decline throughout 2022, suggesting that relatively loose monetary policy is still needed. But, there are growing questions as to whether this period of high inflation will last longer than the ECB expected.

The ECB predicted in September that inflation would reach 2.2% by the end of the year; 1.7% in 2022 and 1.5% in 2023. These estimates will soon be revised.
Rising energy prices, lingering supply chain problems and, more recently, the emergence of a new variant of Covid-19 could push up inflation expectations.

Buckley de Nomura said the longer the high inflation persists, the more markets will feel central banks need to do something about it. This is because higher inflation increases the pressure for tighter monetary policy.

Calls for clearer messages

“The ECB does not need a ‘transitional’ retirement, but should communicate in a more nuanced way the short-term one-off factors and the potential longer-term factors driving inflation up,” said Carsten Brzeski, global head of macroeconomics for ING Research, said by e-mail.

He added that the ECB should recognize that it has been too naïve about the transmission of producer prices to consumer prices and should therefore be careful not to appear convinced of other traditional relationships.

The question of a clearer message has already been raised.

Following the last ECB meeting in October, Nick Andrews, analyst for Europe at Gavekal Research, said President Christine Lagarde “had failed miserably” in casting cold water on market expectations. ” a rise in interest rates in 2022.

“At Wednesday’s close, the short-term interest rate market was forecasting an increase of 23 basis points by December 2022. At the end of Lagarde’s press conference on Thursday, he was counting on an increase of 32 basis points, ”he said in an email.

Going forward, ECB watchers expect the central bank to continue to point out that inflation will slow down next year.

“I still expect the ECB to signal that inflation is expected to ‘come down’ in 2022, but also to point out the upside risks to the inflation outlook,” said Frederik Ducrozet, strategist at Pictet Wealth Management, by e-mail.

He added that the institution could note that “inflation will not fall as quickly and as much as expected”.


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