Euro Area: ECB stands pat but admits higher-than-expected inflation in October meeting

Euro Area Monetary Policy October 2021

Euro Area: ECB stands pat but admits higher-than-expected inflation in October meeting

At its meeting on 28 October, the European Central Bank (ECB) reaffirmed it will conduct net asset purchases under the pandemic emergency purchase program (PEPP) at a “moderately lower pace” than in the second and third quarters of the year. Meanwhile, it kept rates on the main refinancing operations, the marginal lending facility and the deposit facility at their respective all-time lows of 0.00%, 0.25% and minus 0.50%, and it left its other stimulus measures unchanged, thus holding its highly expansionary monetary policy stance. That said, President Lagard noted that the Bank’s previous inflation outlook had been too benign, paving the way for reductions in asset purchases at the next meeting in December.

The ECB considers the economy to be expanding strongly amid the vaccine rollout and sturdy household spending, although supply shortages could limit the pace of recovery. Meanwhile, inflation shot up to 3.4% in September amid spiking energy prices and recovering demand, as well as a low base effect, and the Bank projects it to continue rising for longer than originally expected. That said, inflation should moderate next year, although potentially protracted supply bottlenecks and the second-round effects on wages pose upside risks to inflation.

The Bank reiterated that it will keep interest rates at their current or lower level “until it sees inflation reaching 2.0% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2.0% over the medium term”. It added that this could “imply a transitory period in which inflation is moderately above target”. Our panelists see rates remaining steady throughout next year, with some penciling in the first hike in 2023.

Commenting on the latest decision and possible future moves, Carsten Brzeski, chief Eurozone economist at ING, noted:

“All of this means the ECB is in no rush to tighten monetary policy as it still sticks to the view that the current episode of too high inflation is only temporary. However, the view that the costs of being behind the curve are much lower than the costs of the premature normalisation of monetary policy seems to stand on less solid feet than a few months ago. If today’s ECB meeting was characterised by three words, ‘inflation, inflation, inflation’, then the December meeting could in our view be characterised by three other words: ‘tapering, tapering and tapering’.”

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