Tuesday, February 7, 2023

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European Central Bank holds policy steady despite soaring inflation

European Central Bank President Christine Lagarde.

Handout | Getty Images News | Getty Images

The European Central Bank decided Thursday to keep interest rates and its monetary policy stance unchanged despite ongoing inflationary pressures.

The central bank had announced in September it would be buying less bonds off the back of surging consumer prices. Inflation in the euro zone hit 3.4% in September, representing a 13-year high.

At the time, ECB President Christine Lagarde made it clear this was a recalibration, but not tapering. This is because the ECB is of the view that higher inflation is temporary and will fade throughout 2022.

However, not everyone agrees with the central bank. Speaking to CNBC on Wednesday, James von Moltke, chief financial officer at Deutsche Bank, said that inflation “will be more than transitory.”

“There’s good reasons to think it normalizes over time as some of these particular disruptions flow through the system,” he said in relation to supply chain disruptions. “But we are seeing, again, the corporate clients are telling us that they see more persistence in the inflationary pressures in their businesses than we would have liked to have seen,” he added.

Against this backdrop, ECB watchers are expecting Lagarde to announce a formal tapering in December.

The central bank’s Covid-19 stimulus program — known as the Pandemic Emergency Purchase Program or PEPP — is due to end in early March next year. So, many analysts are expecting a readjustment in the bank’s stimulus ahead of that.

Some have pointed out that the ECB will likely keep buying government bonds, but through other less-flexible programs.

In addition, when it comes to interest rates, some market players believe that the ECB is underestimating inflationary pressures and will therefore likely have to announce a rate hike before the end of next year.

ECB Chief Economist Philip Lane has said that this opinion doesn’t reflect what the bank has guided the markets for. The ECB has previously said it would only start increasing interest rates when inflation remains at 2% for the medium term. At the moment, the bank’s forecasts do not show consumer prices at those levels for a sustained period.

The ECB foresees inflation at 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023 — thus below its 2% target. The bank will be updating those forecasts in early December.

This is a breaking news story and it is being updated.

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