ECB meeting to consider rising inflation in the euro area

Inflation is increasing faster than expected in the euro zone, supply chain disruptions and product shortages drive up costs for manufa...


Inflation is increasing faster than expected in the euro zone, supply chain disruptions and product shortages drive up costs for manufacturers, and there are first signs that the economic recovery slows down.

It’s a concoction that is likely to create divisions among policymakers at the European Central Bank on Thursday as they wonder when to slow down and then end its massive bond buying program.

Analysts expect the bank to announce a slight reduction in the pace of its pandemic-era bond buying program, which buys around 80 billion euros, or $ 95 billion, each month. mainly government bonds. The program, which began in March 2020 as the pandemic spread across Europe, is expected to purchase a total of € 1.85 trillion in bonds and last until at least next March. The slowdown would ensure that purchases are completed on time.

Other policy decisions are expected to remain unchanged, including keeping interest rates below zero and maintaining the size of the bank other bond buying program it was restarted in 2019 to avoid a regional recession.

Decisions will be the first test of updated forecasts from the central bank. In July, policymakers said they were prepared to ignore short-term inflation hikes and would only raise interest rates once it was clear that the annual inflation rate would reach 2% “well before” the end of the central bank’s projection horizon and stay around. this level in the medium term.

New projections for inflation and economic growth will be released on Thursday. The previous forecast, in june, inflation is expected to peak at 2.6% in the fourth quarter and decline to 1.5% in 2022 and 1.4% in 2023.

But inflation has already reached 3% in August, the highest in nearly 10 years, the region’s statistics agency said last week. So far, policymakers are betting that the rise in inflation will be temporary, like other central banks in the world.

In the last few years leading up to the pandemic, the inflation rate was below the bank’s 2% target.

“The stars are much better aligned than they have been for a long time for inflation to return to 2%”, Klaas Knotthe governor of the Dutch central bank and member of the board of governors of the European Central Bank said last week.

He said the markets could expect a policy decision that would see the pandemic bond buying program end in March, which “would imply a reduction in the pace of buying.” Jens Weidmann, the head of the German central bank, said that policymakers should not ignore the risk of “excessively high inflation” and that they should not “commit too long to our very accommodating monetary policy”.

But the European Central Bank as a whole has been more cautious than the Federal Reserve and bank of england on preparing the markets for a return to normal. As the economy rebounds – up 2.2% in the second quarter from the first three months of the year – Christine Lagarde, president of the central bank, highlighted the uncertainty posed by the spread of the Delta variant .

Recently, Philippe lane, the central bank’s chief economist, said there were headwinds for the economy in the second half of the year, including supply chain bottlenecks that could be more persistent than expected.

Silvia Ardagna, analyst at Barclays, said the central bank would try to convince markets that a slowdown in asset purchases under its emergency pandemic response program was “due to improving conditions. growth and inflation outlook “rather than at the start of reducing its bond purchases down to zero.

“Communication is difficult, but the ECB will probably continue to play the ‘loose for a long time’ tune,” Ms Ardagna wrote in a note.

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Newsrust - US Top News: ECB meeting to consider rising inflation in the euro area
ECB meeting to consider rising inflation in the euro area
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