The ECB’s stimulus stance was reaffirmed today with a promise to only “moderately” slow the pace of its € 75 billion asset purchase program.
Some market watchers have expressed hope that the European Central Bank (ECB) may have shifted its posture in a slightly more hawkish direction, given the high level of inflation.
Spain on Thursday released CPI inflation data showing prices in the country rising at their fastest rate in 30 years. The energy crisis is driving up headline inflation rates across the continent.
A forecast of 4.5% saw an actual reading higher, at 5.5% year-on-year for October. The CPI figure in September was 4%.
ECB stimulus – PEPP will remain in place until at least March 2022
But with an eye to keep the governing council on track, the Pandemic Emergency Purchase Program (PEPP) will be maintained and running at a cost of € 1.85 trillion until March 2022.
But the ECB’s dovishness hasn’t impressed the markets, with many already hoping the stimulus will be restored and interest rates will be higher, by at least 20 basis points by 2022.
Inflation in Germany’s most important economy is now running hot at 4.6%.
Eurozone inflation and German GDP data are on tap tomorrow.
The ECB governing council meeting in December will be important
The decision time came in December but so far President Christine Lagarde has had the unenviable task of discussing market policy showing awareness of the need to control inflation. New economic projections at the Governing Council’s December meeting should help the ECB more accurately calibrate its policies and messaging.
Markets are beginning to worry that the ECB, which has become accustomed to managing very low and negative interest rates may be too late to act on inflation, forcing it to take more drastic action later.
Lagarde spoke at a press conference in Frankfurt at 2:30 p.m.
Fears that ECB policymakers are falling behind the curve have been thrown into sharper relief by recent moves by New Zealand and Canadian central banks to raise rates and the Bank of England is strongly suggesting it intends to do the same before the end of the year.
ECB policymakers are divided sharply
But a number of ECB officials continue to hold the view that the eurozone economy still needs stimulus support, while others are increasingly concerned today about the outlook for inflation.
An indication of intense divided debate, Italy’s Ignazio Visco said support for PEPP should remain in place after March 2022, while the Netherlands ’Klaas Knot disagreed.
The deposit rate remains at -0.5%, with policymakers insisting interest rates will not rise until projections show inflation sustainable at 2%. That last point raises an eyebrow at the market, whose inflation looks like it could be embedded at a higher level driven by supply chain disruptions and shortages.
The asset purchase program prior to the pandemic remains at a rate of € 20 billion a month and long -term loans will continue to be extended to banks to support lending.