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The ECB’s Lagarde is seeing higher inflation.Push back bets on rate hikes

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Frankfurt — European Central Bank Governor Christine Lagarde confirmed Thursday that inflation would continue for longer, but opposed market bets that price pressures would cause rate hikes soon next year.

Lagarde said the ECB has made a lot of “soul quests” for its stance as the world’s central banks are showing stricter policies amid rising prices, but inflation remains temporary. He concluded that the policy response was premature.

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“We talked about inflation, inflation, inflation,” Lagarde said at a press conference following the ECB’s policy meeting.

She temporarily promotes inflation in the euro area with temporary basic effects such as rising energy prices, a global mismatch between supply and demand recovery, and the end of the German excise tax cut3. We have identified it as one of the main factors.

“Inflation will take longer than previously expected, but we expect these factors to ease over the next year … Inflation is below our target of 2% in the medium term.” Said Lagarde.

She also aimed at market expectations for a rate hike in October next year, arguing that it was not in line with the bank’s policy guidance that inflation would not rise until inflation in the euro area as a whole in 19 countries returned to its target by the medium term. It is set to hold for the forecast period and there.

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“Clearly not satisfied with the current analysis (these conditions) and certainly not in the near future,” Lagarde said, adding that it wasn’t for her to say if the market was ahead of them. ..

However, her intervention rarely upset investors, and the 10 basis point rise in deposit rates of minus 0.5% in October next year remained fully priced due to transaction delays.

“Mr. Lagarde clumsyly read from the paper that market bets on interest rates did not follow the ECB’s guidance,” said Jan von Gerich, an economist at Nordia.

“If her intention was to bring market pricing in line with the ECB’s guidance, she failed miserably.”

Investors also noted Lagarde’s perception that supply turmoil, a major cause of price increases, would not be resolved until the end of the first quarter, with some companies expecting difficulties throughout 2022.

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“The rebound was relatively mild, the market had a hawkish aftertaste, higher bond yields and wider peripheral spreads,” said Frederik Ducloset, a strategist at Picte.

ECB THE OUTLIER

Lagarde has shown that the ECB is not indifferent to the global environment and said the € 1.85 trillion Pandemic Emergency Purchase Program (PEPP) is likely to end as scheduled for March next year.

Such movements are widely expected by investors. But Lagarde doesn’t say whether, as many would expect, replacing lost purchases with traditional tools to bring borrowing costs closer to record lows and help recover. ..

The ECB could remain outliers as other central banks around the world are already reacting to rising inflation.

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The Bank of Canada said Wednesday that it could raise interest rates in April 2022 and that inflation remained above target for most of next year.

The Federal Reserve Board of Governors and the Bank of England have also signaled tightening of policy, with some small central banks from Norway to South Korea already raising rates.

Beyond the inflationary commentary, the ECB did not change its policy as widely expected, ending the emergency stimulus in December and preparing to decide whether to return the policy to a more normal setting.

With Thursday’s decision, the ECB will continue to buy bonds at a “moderately” slower pace than the previous two quarters, keeping the benchmark rate at minus 0.50%. (Written by Mark John, edited by Catherine Evans)

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The ECB’s Lagarde is seeing higher inflation.Push back bets on rate hikes

https://financialpost.com/pmn/business-pmn/ecbs-lagarde-sees-higher-inflation-pushes-back-on-rate-hike-bets The ECB’s Lagarde is seeing higher inflation.Push back bets on rate hikes

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