European Central Bank keeps rates steady, despite record inflation

The European Central Bank on Thursday maintained a cautious approach in the face of record inflation in the eurozone, but Christine LagardeThe bank’s president, acknowledged that “the situation has really changed” and refused to rule out a rate hike in 2022.

No change in policy is expected when the European Central Bank’s Board of Governors meets this week for the first time this year, but pressure is mounting from all sides as prices in Europe continues to increase. Hours before the meeting in Frankfurt, the Bank of England raised interest rates for the second consecutive meeting, to 0.5%.

Traders were at odds with the central bank’s message that the eurozone economy was not ready for higher interest rates. On Wednesday, ahead of the policy announcement, markets were pricing in two 10-bps deposit rate hikes this year. The rate is now negative 0.5 percent.

Inflation data for the euro area released on wednesday Economists were surprised to find that January’s price growth in the 19 countries that use the common currency had increased to 5.1% from a year ago. That was only a slight increase from the 5% rate in December, but set another record for the euro area. Analysts had predicted that the January rate would drop to 4.4% – still well above the bank’s 2% target.

Ms. Lagarde blamed persistently high energy prices and the rise in food prices.

“Compared to our expectations for December, the risks to the inflation outlook are tilted to the upside,” she said. “Especially for the time being.”

However, she noted that the pandemic appears to be abating and supply chain problems are expected to follow, suggesting economic growth will pick up later this year.

But if the economy heats up too quickly, or if there is a worsening of what she calls “geopolitical clouds” over Europe – without specifically mentioning tensions between Russia and the West. on Ukraine – inflation is likely to remain high.

The bank’s board said on Thursday that it expected key rates to “remain at current levels or below” until policymakers see inflation “reaching 2 % before the end of the forecast and long-term for the rest of the forecast.”, adding that it will withstand higher inflation in the near term.

The bank also said it remained on track to end its pandemic bond-buying program in March, but maintained support for the economy by continuing another legacy bond-buying program.

In December, Ms Lagarde said that policymakers were “very unlikely” to raise rates in 2022, assuming inflation would fall this year and settle below the bank’s 2% target, ensure the expansion of monetary stimulus.

On Thursday, she declined to repeat that line, saying the council would review the situation when it next convenes on March 10.

“The situation has really changed,” she said, referring to inflation based on the latest data. “So the situation has changed, we need to continue to monitor it very carefully, we need to assess the situation on the database and then we will make a judgment.”

Other members of the bank’s Board of Directors pointed to reasons why inflation could remain high for longer than expected.

This early year, Isabel Schnabela member of the Executive Board, said the transition to a low-carbon economy could require higher fossil fuel prices and increased energy bills and could pose “measurable increased risks”. yes” to the bank’s inflation forecast.

Luis de Guindos, the bank’s vice president, said in a speech last month that inflation would not be “transient as was forecast just a few months ago.”

The central bank has insisted that it will not change interest rates before stopping asset purchases to inject capital and liquidity into the market. It will update its inflation forecast again in March.

Holger Schmieding, economist for the Berenberg economic group, wrote in a note to clients: “Unlike the United States, the eurozone shows no signs of excess demand nor excessive wage increases. But he predicts that “unless the central bank returns to its normal policy stance significantly faster than planned in December”, inflation is likely to remain above the bank’s target over the long term. .

“Multiple sclerosis. Lagarde today took a big step towards this assessment, emphasizing that inflation could become even higher in the short term and the outlook is uncertain,” he said. write.

Earlier on Thursday, Bank of England raised its prime rate by a quarter of a percent, the second hike in the last two meetings, and sadly it will also begin to shrink its holdings of government and corporate bonds. United States, The Federal Reserve has signaled that they plan to raise rates in March.

Eshe Nelson contribution report. European Central Bank keeps rates steady, despite record inflation

Fry Electronics Team

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