LONDON—The inflation genie is yet retired of its bottle.
Now investors are waiting to spot whether the European Central Bank (ECB) connected Thursday admits that terms pressures are excessively important to ignore. They volition besides privation an mentation of what that means for its ultra-easy argumentation stance.
Big decisions connected the aboriginal of the ECB’s pandemic exigency stimulus volition hold until December. But with surging vigor prices and proviso bottlenecks, Thursday’s gathering should beryllium thing but dull.
Here are 5 cardinal questions connected the radar for markets.
1. What Does High Inflation Mean for the Policy Outlook?
The ECB whitethorn admit that a leap successful terms pressures is apt to past longer than anticipated, but the cardinal slope is improbable to wantonness its dovish argumentation stance conscionable yet.
Its 2023 ostentation forecast is 1.5 percent, beneath the 2 percent target, and policymakers reason that tightening argumentation excessively aboriginal could wounded the economy.
ECB Chief Economist Philip Lane has argued that the existent bout of ostentation successful the bloc is not a trigger for monetary argumentation enactment arsenic maturation successful services prices and wages remains weak.
“They person to beryllium precise cautious they don’t scare the horses,” said Craig Inches, caput of rates astatine Royal London Asset Management. “If they travel retired a small spot connected the hawkish side, definite peripheral markets could commencement to struggle.”
2. What About the Mismatch Between the ECB’s Guidance and Market Pricing connected Interest Rates?
Indeed, rate-hike expectations person changeable up successful caller weeks and markets are pricing successful a 10 basis-point complaint emergence by the extremity of 2022.
This is retired of sync with the ECB’s ultra-loose monetary argumentation stance and is simply a interest if higher marketplace lending rates trigger tighter fiscal conditions.
The assertive re-pricing is mostly a spillover from a crisp readjustment successful Britain and the United States wherever investors are present expecting tighter policy. Lane has already pushed backmost against the marketplace pricing; ECB main Christine Lagarde whitethorn bash the aforesaid connected Thursday.
“We expect the ECB to stay dovish, portion markets whitethorn proceed to hedge against an earlier tightening by the ECB,” said Societe Generale elder European economist Anatoli Annenkov.
3. Where Will Inflation Settle Once Price Pressures Abate?
For immoderate policymakers, changing ostentation dynamics cannot beryllium ignored. So what the ECB says astir wherever it expects ostentation to settee volition beryllium watched closely.
Bundesbank President Jens Weidmann, a professional of the ECB’s ultra-easy monetary policy, again warned of ostentation risks past week arsenic helium announced his program to measurement down aboriginal astatine the extremity of December.
Euro portion inflation, astatine 3.4 percent, is astatine its highest level since 2008 and is expected to attack 4 percent by year-end. One cardinal contented is what happens if ostentation expectations emergence supra people and signs of second-round effects connected wages emerge.
4. What About the Risks to the Economic Outlook?
Supply bottlenecks and surging vigor prices mean economical headwinds person grown stronger since the September ECB meeting.
Germany is already feeling the strain of supply-chain bottlenecks and its apical economical institutes conscionable chopped their associated forecast for 2021 maturation to 2.4 percent from 3.7 percent.
And portion higher vigor prices are an upside hazard to inflation, they besides compression consumers’ purchasing powerfulness and institution profits.
“We are inactive waiting for much radical astatine the ECB to admit those important downside risks to growth,” BofA analysts said.
5. Will We Get a Sense of What Comes After the PEPP?
A determination connected what comes aft the 1.85 trillion euro Pandemic Emergency Purchase Programme (PEPP) expires adjacent March is expected successful December, and a statement connected what volition travel is nether way.
The ECB should support immoderate of the flexibility offered by the PEPP erstwhile it returns to much accepted policy, ECB policymaker Francois Villeroy de Galhau believes.
According to 1 caller report, the ECB is studying a caller bond-buying strategy to forestall marketplace disruption erstwhile the PEPP ends, complementing an existing open-ended 20 cardinal euro-a-month plus acquisition programme.
By Dhara Ranasinghe and Saikat Chatterjee