© Reuters. File picture: The headquarters of the European Central Bank (ECB) can be seen in Frankfurt, Germany on March 7, 2018. REUTERS / Ralph Orlowski
Authors: Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters)-The European Central Bank will almost certainly keep its policy unchanged on Thursday and postpone rising expectations for a rate hike next year, although it can admit that inflation will be higher, provided that this is the case.
The President of the European Central Bank, Christine Lagarde, has hinted that a major policy decision will be made in December, paving the way for reversing emergency measures.
But she may point out again that the European Central Bank is not in a hurry to tighten policy further, even if some of its peers have raised interest rates or considered doing so.
However, its work will be cut to convince investors that this is the right approach. They are increasingly suspicious of the European Central Bank’s remarks that inflation is temporary and that raising interest rates still has a long way to go.
This has led to a huge gap between market expectations and the bank’s own predictions, that is, interest rates will remain low until inflation stabilizes at 2%.
In fact, the market now expects an increase in the fall of next year and expects that the inflation rate in the next few years will be close to the ECB’s target level, which is completely inconsistent with the ECB’s own forecast.
Philip Lane, the chief economist of the European Central Bank, has tried to overturn these expectations, saying they are “working hard to accept” the bank’s own guidelines.
But this intervention has little effect, so Lagarde may need to tell investors more clearly that they misunderstood the central bank.
The disconnect is entirely due to inflation. Analysts predict that due to a long list of one-off factors, price growth this year may reach 4%, twice the European Central Bank’s target, and the rate of decline may be slower than the European Central Bank admits.
Even if it is temporary, such price surges may amplify potential price pressures, and if they last long enough, they will have an impact on wage setting.
High energy prices may also force companies to adjust their pricing behavior to account for rising costs.
The European Central Bank said it would not, but the market held a different view.
“Lagarde should, and may try to use greater force to deal with this revaluation,” said Marco Wali, an economist at Yuxin Bank.
“An important feature of the European Central Bank’s interest rate stance is that the market can now ignore it. Its wording has significantly reduced the scope of preventive tightening.”
In December, the European Central Bank may decide to end emergency measures in March next year, but it may implement another support plan to take over and keep borrowing costs low.
He has many reasons to be cautious.
Hard data shows that there is no shocking wage growth, which indicates that inflation will be more persistent, and analysts’ forecasts are not up to the European Central Bank’s rate hike standards.
The European Central Bank has also exceeded its target for nearly a decade, so premature decisions will especially damage its credibility.
Policymakers still remember clearly that the bank’s interest rate hike on the eve of the eurozone debt crisis ten years ago was arguably the biggest policy error in the institution’s history.
Michael Schubert, an economic analyst at Commerzbank (DE:), said: “For the European Central Bank, a sharp increase in wages may not be enough when the labor market situation improves and inflation is high.”
“On the contrary, they should grow so quickly and so quickly to prevent a decline in inflation due to the expiration of the transition effect in the coming year,” he said.
Finally, the significant economic slowdown in the next quarter also indicates that expectations for tightening policies are colder.
As most of the block industry suffers from a certain degree of supply shortage, as the new wave of coronavirus pandemic may also hit the service industry, growth is expected to slow.
All these add up to show that the European Central Bank has adopted a cautious tone, and reiterated that even if the emergency stimulus measures are cancelled, it will only be a policy readjustment, rather than the government’s withdrawal of support.
The European Central Bank’s policy decision is expected to be announced at 11:45 GMT, and Lagarde will hold a press conference at 12:30 GMT.