Brussels (Brussels Morning) The European Central Bank (ECB) is to decide on the EU’s inflation response later this week as markets expect interest rates to rise.
Investors want the ECB to explain what rising energy prices and global supply chain disruptions mean for the bank’s expansive monetary policies and record-low interest rates, Reuters reports.
The ECB is to decide on its coronavirus crisis stimulus in December, but is not expected to scrap its dovish policy stance.
ECB Chief Economist Philip Lane previously stated that rising inflation in the EU is not a reason to change monetary policies since the growth of wages and service prices remains limited.
Craig Inches, head of rates and cash at the Royal London Asset Management investment management company, pointed out that “they have to be very careful they don’t scare the horses.”
He warned that “if they come out a little bit on the hawkish side, certain peripheral markets could start to struggle.”
ECB’s policies questioned
Rate-hike expectations have gone up in the recent weeks, with markets expecting a rate rise of 10 basis points by the end of next year, an assumption that is not in sync with ECB’s expansive monetary policies.
Société Générale senior European economist, Anatoli Annenkov, has noted that “we expect the ECB to remain dovish, while markets may continue to hedge against an earlier tightening by the ECB.”
Germany’s Federal Bank head Jens Weidmann warned last week of inflation risks and criticised the ECB’s monetary policies.
The inflation rate in the eurozone stands at some 3.4%, the highest level since 2008, and is expected to reach roughly 4% by the end of the year. The ECB expects it to stand at approximately 1.5% in 2023.
Compared to September, when the ECB discussed the situation, supply chain disruptions have worsened and energy prices have surged.
Pointing to supply bottlenecks, German economic institutes lowered their 2021 growth forecast from 3.7% to 2.4%.
Bank of America Corporation analysts noted “we are still waiting for more people at the ECB to acknowledge those significant downside risks to growth.”
