ECB holds firm on view that inflation surge is temporary

Policy on stimulus unchanged ahead of expected December move

European Central Bank (ECB) president Christine Lagarde pushed back on Thursday against market bets that runaway inflation would force a rate hike as early as next year, reaffirming the view that price pressures would ease by then.

With central banks elsewhere indicating they are heading down a path to tighter policy, Ms Lagarde said the ECB governing council had done much “soul-searching” over its stance but concluded it was correct.

The topic had dominated the policy discussion, she told a news conference: “We talked about inflation, inflation, inflation.”

Ms Lagarde identified higher energy prices, a global mismatch between recovering demand and supply, and one-off base effects such as the end of a cut in German sales taxes, as the three main factors temporarily driving euro zone inflation.


“While inflation will take longer to decline than previously expected, we expect these factors to ease in the course of next year. . . We continue to see inflation in the medium term below our 2 per cent target,” she said.

Referring to ECB policy guidance stipulating interest rates will not rise until inflation is seen heading back to target by the middle of the forecast period and due to hold there, she added: “Clearly under the current analysis [those conditions] are not satisfied and certainly not in the near future.”

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


But household inflation expectations are now rising quickly and investors are also doubting that view, pricing in a rate hike by the end of next year and opening a big gap between the ECB’s own guidance and market expectations.

Adding pressure, German consumer prices rose a more-than-expected 4.6 per cent in October, data showed on Thursday, reflecting growing price pressures in Europe’s largest economy.

The phenomenon is global, however, and central banks around the world are already reacting. The Bank of Canada was the latest to do so, when it indicated on Wednesday it could hike interest rates as soon as April 2022 and said inflation would stay above target through much of next year.

The US Federal Reserve and the Bank of England have also signalled policy tightening while several smaller banks, from Norway to South Korea, have already hiked rates.

Beyond the inflation commentary, the ECB kept policy unchanged as widely expected before a crucial December decision on whether to end emergency stimulus and return policy to a more normal setting. It reaffirmed its plan to keep buying bonds to pin borrowing costs near record lows.

The ECB is likely to remain an outlier. Come December, it is likely to decide to end emergency stimulus but will probably ramp up another support scheme to pick up the slack and keep borrowing costs down.

With Thursday’s decision, the ECB will continue buying bonds at a pace “moderately” slower than in the preceding two quarters and will keep its benchmark rate at minus 0.50 per cent.

Personal trading

The ECB president said the bank was reviewing its rules regarding policymakers’ personal assets and strived to be as transparent on the issue as possible.

The bank has been urged to tighten the rules governing the personal investments of its policymakers, most of whom pick their own funds, stocks and bonds.

"We publish the holdings that board members have, that governing council members have and so on," Ms Lagarde told reporters after the bank's policy meeting. "Our ethics committee and the ethics officer are currently reviewing, revisiting those rules to make sure that everything is plain, transparent, without any conflict, and that those rules be adhered to and respected by all members concerned."

The Federal Reserve last week banned individual stock purchases by its top officials and unveiled other restrictions after an uproar over trades made in 2020, when the US central bank intervened to stop a collapse in financial markets as the Covid-19 pandemic raged.

An ECB spokesperson said last week the central bank had been reviewing its ethics framework for some time, chiefly with the aim of harmonising rules across the different national authorities, but declined to comment on the details. – Reuters