ECB Stimulus Stance Unchanged Even as Inflation Heats Up

The ECB stimulus stance was reaffirmed today with a commitment to only “moderately” slow the pace of its €75 billion asset-purchase programme.

Some market watchers held out the prospect that the European Central Bank (ECB) might have shifted its posture in a slightly more hawkish direction, given the elevated level of inflation.

Spain on Thursday released CPI inflation data showing prices in the country increasing at their fastest rate in 30 years. The energy crisis is driving up headline inflation rates across the continent.

A forecast of 4.5% saw an actual reading much higher, at 5.5% year on year for October. September’s CPI figure was 4%.

ECB stimulus – PEPP to stay until at least march 2022

But with an eye to keeping the economic recovery on track the governing council will keep the Pandemic Emergency Purchase Programme (PEPP) up and running  to the tune of €1.85 trillion until March 2022.

But the ECB’s dovishness is not impressing the markets, with many now expecting stimulus to be rolled back and interest rates to stat moving higher, by at least 20 basis points in 2022.

Inflation in the all-important German economy is now running hot at 4.6%.

Eurozone inflation and German GDP data is on tap tomorrow.

December ECB governing council meeting will be pivotal

Decision time arrives in December but in the meantime President Christine Lagarde has the unenviable task of communicating policy to the market that shows awareness of the need to get inflation under control. New economic projections at the December meeting of the Governing Council should help the ECB to more accurately calibrate its policies and messaging.

Markets are starting to worry that the ECB, which has grown accustomed to managing ultra-low and negative interest rates may leave it too late to act on inflation, forcing it to take more severe action later.

Lagarde speaks at a Frankfurt press conference at 2.30pm.

Fears that the ECB policymakers are falling behind the curve has been thrown into sharper relief by the recent moves of the New Zealand and Canadian central banks to increase rates and the Bank of England strongly signalling its intention to do the same before year’s end.

ECB policymakers sharply divided

But a number of ECB officials continue to hold to the view that the eurozone economy is still in need of stimulus support, while others grow more alarmed by the day about the outlook for inflation.

Indicative of the sharply divided debate, Italy’s Ignazio Visco says PEPP support should stay in place beyond March 2022, while the Netherlands’s Klaas Knot disagrees.

The deposit rate remains at -0.5%, with policymakers insisting that interest rates won’t rise until projections show inflation sustainably at 2%. That last point has raised eyebrows in the market, with inflation looking like it might become embedded at a much higher level driven by supply chain disruptions and shortages.

The asset purchase programme that predates the pandemic stays in place at a rate of €20 billion a month and long-term loans will continue to be advanced to banks in order to support lending.