FRANKFURT (Reuters) – European Central Bank President Christine Lagarde said on Wednesday it was highly unlikely that the European Central Bank would raise interest rates next year as inflation remains very low, responding to market bets for a move next October.
With inflation hitting a 13-year high, markets are increasingly betting that the European Central Bank will roll back its ultra-easy monetary policy and raise interest rates next year for the first time in more than a decade.
“In our future guidance on interest rates, we have clearly made clear the three conditions that must be met before rates start to rise,” she said at an event in Lisbon.
“Despite the current high inflation, the medium-term inflation outlook remains weak, and therefore these three conditions are unlikely to be met in the coming year.”
Lagarde’s comments come after she failed last week to push back market expectations, and investors priced in twice as briefly as interest rate hikes in 2022.
But investors seem to be taking notice this time and pricing for the next step, up 10 basis points, falls on Wednesday from next October to December 2022.
Yields fell overall, as did the spread between German and Italian debt, an important indicator for the European Central Bank.
Spanish Central Bank President Pablo Hernandez de Cos, an influential voice on the rate-setting board, echoed Lagarde’s message, arguing that market pricing was out of sync with future guidance.
“Market interest rates have risen over the past weeks, mainly due to increased market uncertainty about inflation expectations, spillovers from abroad to Eurozone interest rate expectations, and some questions about the calibration of asset purchases in the post-pandemic world,” Lagarde said.
It also reversed the recent rise in yields, warning that the European Central Bank will continue to use emergency asset purchases to keep borrowing costs low.
“An undue tightening of financing conditions is not desirable at a time when purchasing power is already under pressure due to rising energy and fuel bills, and would represent an unjustified headwind for the recovery,” Lagarde said.
The European Central Bank and financial investors have been at odds over the likely path of inflation, the most important guiding metric for policy, in part because the ECB itself is unsure about inflation.
“Our assessment is that the current inflationary rise is mainly due to factors of a transitional nature, although these factors could show a higher degree of stability than initially expected, so we expect to continue to see relatively high inflation rates in the coming months,” added De Spanish cos.
(Reporting by Balaz Kurani; Additional reporting by Sergio Goncalves in Lisbon and Jesus Aguado and Emma Pinedo in Madrid; Editing by Francesco Canepa and Catherine Evans)