Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Inflation genie out of the bottle: Five questions for the ECB

EconomyOct 25, 2021 02:51AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski/File Photo

By Dhara Ranasinghe and Saikat Chatterjee

LONDON (Reuters) - The inflation genie is finally out of its bottle.

Now investors are waiting to see whether the European Central Bank on Thursday admits that price pressures are too significant to ignore. They will also want an explanation of what that means for its ultra-easy policy stance.

Big decisions on the future of the ECB's pandemic emergency stimulus will wait until December. But with surging energy prices and supply bottlenecks, Thursday's meeting should be anything but dull.

Here are five key questions on the radar for markets.

1/ What does high inflation mean for the policy outlook?

The ECB may acknowledge that a jump in price pressures is likely to last longer than anticipated, but the central bank is unlikely to abandon its dovish policy stance just yet.

Its 2023 inflation forecast is 1.5%, below the 2% target, and policymakers argue that tightening policy too early could hurt the economy.

ECB Chief Economist Philip Lane has argued that the current bout of inflation in the bloc is not a trigger for monetary policy action as growth in services prices and wages remains weak.

"They have to be very careful they don't scare the horses," said Craig Inches, head of rates at Royal London Asset Management. "If they come out a little bit on the hawkish side, certain peripheral markets could start to struggle." Graphic: ECB and markets,

2/ What about the mismatch between the ECB's guidance and market pricing on interest rates?

Indeed, rate-hike expectations have shot up in recent weeks and markets are pricing in a 10 basis-point rate rise by the end of 2022.

This is out of sync with the ECB's ultra-loose monetary policy stance and is a concern if higher market lending rates trigger tighter financial conditions.

The aggressive re-pricing is mostly a spillover from a sharp readjustment in Britain and the United States where investors are now expecting tighter policy. Lane has already pushed back against the market pricing; ECB chief Christine Lagarde may do the same on Thursday.

"We expect the ECB to remain dovish, while markets may continue to hedge against an earlier tightening by the ECB," said Societe Generale (OTC:SCGLY) senior European economist Anatoli Annenkov. Graphic: Global money markets raise central bank rate hike bets Global money markets raise central bank rate hike bets ,

3/ Where will inflation settle once price pressures abate?

For some policymakers, changing inflation dynamics cannot be ignored. So what the ECB says about where it expects inflation to settle will be watched closely.

Bundesbank President Jens Weidmann, a critic of the ECB's ultra-easy monetary policy, again warned of inflation risks last week as he announced his plan to step down early at the end of December.

Euro zone inflation, at 3.4%, is at its highest level since 2008 and is expected to approach 4% by year-end. One key issue is what happens if inflation expectations rise above target and signs of second-round effects on wages emerge. Graphic: Eurozone inflation,

4/ What about the risks to the economic outlook?

Supply bottlenecks and surging energy prices mean economic headwinds have grown stronger since the September ECB meeting.

Germany is already feeling the strain of supply-chain bottlenecks and its top economic institutes just cut their joint forecast for 2021 growth to 2.4% from 3.7%.

And while higher energy prices are an upside risk to inflation, they also squeeze consumers' purchasing power and company profits.

"We are still waiting for more people at the ECB to acknowledge those significant downside risks to growth," BofA analysts said. Graphic: Supply chain shortages,

5/ Will we get a sense of what comes after the PEPP?

A decision on what comes after the 1.85 trillion euro pandemic emergency purchase programme (PEPP) expires next March is expected in December, and a debate on what will follow is under way.

The ECB should keep some of the flexibility offered by the PEPP when it returns to more conventional policy, ECB policymaker Francois Villeroy de Galhau believes.

According to one recent report, the ECB is studying a new bond-buying scheme to prevent market disruption when the PEPP ends, complementing an existing open-ended 20 billion euro-a-month asset purchase programme. Graphic: Life after PEPP,

Inflation genie out of the bottle: Five questions for the ECB

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email