Lagarde stops market bets on ECB rate hikes

The president of the Banco Central European (ECB), Christine Lagarde, rejected market bets that runaway inflation would force a hike upwards of interest rates next year in the euro zone, reaffirming the perception that price pressures will ease by then.

As central banks in other regions of the world move toward tighter monetary policy, Lagarde said the ECB’s Governing Council had conducted a lengthy “soul-searching” on its position, but concluded that it was the correct one.

The issue dominated the ECB’s monetary policy discussion this week, he said. “We are talking about inflation, inflation, inflation.”

Lagarde identified higher energy prices, a global mismatch between the recovery in demand and supply, and unique base effects such as the end of a sales tax cut in Germany, as the top three driving factors. temporarily inflation in the euro zone.

“While inflation will take longer to drop than previously expected, we expect these factors to decline over the next year. We continue to see inflation in the medium term below our goal of 2%, ”he stated.

Referring to the ECB’s guidance that stipulates that interest rates will not rise until inflation is seen to return to target towards the middle of the forecast period and remains there, he added: “Clearly under the current analysis (those conditions) they are not fulfilled and they will not do so in the near future ”.

The ECB has long argued that the current spike in prices is fleeting and that underlying inflationary pressures are weak enough to require its monetary support for years to come.

But consumer inflation expectations are rising rapidly in the euro zone and investors doubt that view too, expecting a rate hike by the end of next year, opening a big gap between the ECB’s own guidance. and market forecasts.

Data released Thursday indicated that German consumer prices rose 4.6% in October, higher than expected, reflecting mounting price pressures in Europe’s largest economy.

Cautious position

However, the phenomenon is global and central banks around the world are already reacting.

The Bank of Canada was the last to do so, when it indicated on Wednesday that it could raise interest rates in April 2022 and said that inflation would remain above target for much of next year.

The US Federal Reserve and the Bank of England have also signaled a tightening of monetary policy, while several smaller banks, from the governing bodies of Norway to South Korea, have already raised rates.

Beyond the comments on inflation, the ECB kept its monetary policy unchanged on Thursday – as widely expected – ahead of a crucial decision in December in which it will be up to it to decide whether to end its emergency stimulus with a view to a normalization cycle.

The ECB reaffirmed its plan to keep buying bonds to fix borrowing costs near historic lows.