Christine Lagarde, President of the European Central Bank, speaks at the bank’s press conference in Frankfurt, Germany.
Boris Rossler | Image Alliance | Getty Images
For some time, central bank watchers have expected the October ECB meeting to be relatively unexciting, but the current mix of slower growth and higher inflation could make it more exciting than originally anticipated.
Although big decisions about the future of the European Central Bank’s emergency stimulus package – the Pandemic Emergency Purchase Program – are unlikely to be revealed until December, investors’ attention will focus on comments made by ECB President Christine Lagarde at Thursday’s press conference.
“We see scope for the ECB to continue its push against current market rates in its contacts at the meeting,” Spyros Adreopoulos, chief European economist at BNP Paribas, said in a recent note.
“The other side of the pullback from market prices is that we also expect Christine Lagarde to maintain that the current rise in inflation is largely temporary.”
The Eurozone economy is currently facing several adverse economic shocks. Supply chain bottlenecks have led to shortages of all kinds of goods, and gas prices are at record levels. Despite these uncertainties, the market is currently pricing in the first rate hike by the central bank at the end of 2022.
“The market will be eager to hear if Chief Lagarde … ECB Chief Economist Lane strongly argues that the market timing for the hike is not in line with the new guidance,” wrote Mark Wall, chief economist at Deutsche Bank.
Earlier this month, European Central Bank chief economist Philip Lane questioned whether interest rates would rise at the end of next year, given that the central bank said it would not raise rates until inflation hit 2% over the medium term.
“When you look at market rates for the forward rate curve, I think it’s difficult to reconcile some of the market’s views with our clear and direct guidance,” Lin said at an online event, according to Reuters.
Eurozone inflation hit a 13-year high in September, driven mainly by higher energy prices, higher car prices, and higher accommodation costs.
“While the higher prices for “accommodation” should be interpreted as [a] “Catching up” higher car prices reflects supply-side bottlenecks, Dirk Schumacher said in a note to customers.
“The September numbers provide tentative evidence that the catch-up in inflation is a one-off and therefore temporary, while the price pressure from the bottlenecks has not yet abated.”
Investors will be watching for any sign of a shift in the ECB’s thinking about the nature of the current spike in inflation. So far, the consistent narrative has been that “the current increase in inflation is expected to be largely temporary and that underlying price pressures are slowly building up,” Lagarde stated in September. Any change in this assessment could be a real market driver as it could also include a more hawkish tone within the bank’s board of directors.
So far, the majority of economists expect the ECB to err on the pessimistic side in an effort to prevent an undue tightening of financial conditions when the economic recovery in the Eurozone slows.