The European Central Bank expected to raise inflation expectations again
European Central Bank policy makers expect the central bank to raise its short-term inflation forecast next month as uncertainty remains over how quickly it will need to respond to higher prices.
The European Central Bank has consistently underestimated how quickly inflation will rise in the eurozone this year as the economy recovers from the coronavirus pandemic. Central bank board members said they expect to raise its 2022 forecast again in December, according to the minutes of its October meeting, which were published on Thursday.
But council members agreed that there was “high” uncertainty about price growth forecasts in 2023 and 2024, one of the key criteria the central bank will use to calibrate bond purchases and interest rates in the coming year.
They believe this means that they must maintain “discretionary” in their future bond purchases for as long as possible, so that they can respond if inflation falls below target or remains higher.
“While the increased risks of a spike in inflation had to be recognized, it was deemed important for the Governing Council to avoid overreaction as well as undue inaction, and to maintain sufficient discretion in calibrating monetary policy measures to address all inflation scenarios that might unfold.”
Eurozone inflation hit a 13-year high of 4.1 percent in October, well above the European Central Bank’s 2 percent target, prompting some investors to bet the ECB will raise interest rates next year.
But the European Central Bank’s Council agreed last month that many of the factors driving inflation higher this year – including higher energy prices and supply chain bottlenecks – are likely to fade next year, albeit more slowly than it recently forecast.
“Members broadly agreed on the expected hump pattern in short-term inflation expectations,” it said.
The European Central Bank is increasingly diverging from other major central banks, such as the US Federal Reserve and the Bank of England, which have responded to the recent spike in inflation by promising to tighten policy.
Investors are eagerly awaiting the European Central Bank’s December meeting. Most expect the central bank to decide that the 1.85 trillion euro bond-buying programme, which it launched last year in response to the pandemic, will halt new purchases in March 2022.
However, the central bank is widely expected to step up its long-term asset purchase program to mitigate the impact of the cut on stimulus.
Some of the more conservative council members have argued that the European Central Bank should be prepared to halt its new bond purchases very quickly next year if inflation does not fall as expected.
However, others urged patience, noting that there were few indications that wages were spiraling upward.
Council members concluded last month that they “must be patient in light of the growing uncertainty,” the European Central Bank said. “It was considered important that the board retain sufficient options to allow for future monetary policy actions.”
Jacob Neil, head of European economics at Morgan Stanley, said the minutes, combined with risks from recent coronavirus lockdowns in several European countries, indicated the ECB was likely to opt for a “soft cut in purchases,” and maintain the electives” in the month of December. Meeting.
“With widening divisions within the board and huge uncertainties about the medium-term inflation outlook, it may be difficult for the ECB to commit to further support for an extended period of time,” said Fabio Balboni, chief economist at HSBC.