25 Oct 2021, 10:12

ECB charts lonely course through inflation spike

 FRANKFURT, Oct 25, 2021 (BSS/AFP) - Pressure is growing on the European
Central Bank to respond to rising inflation in the eurozone, as its
counterparts in the United States and the United Kingdom signal willingness
to take action.

  ECB policymakers will meet on Thursday, with markets hoping for hints on
when the bank might start raising historically low interest rates or tweak
the pace of bond buying under its massive pandemic-era stimulus programme.

  Bottlenecks have pushed up prices and pinched industrial production in the
eurozone, drawing a tightrope for policymakers to walk as withdrawing
stimulus to quash inflation risks further crimping the economic recovery.

  In September, prices in the euro area rose 3.4 percent year on year, a 13-
year high pushed by the cost of energy, and well above the bank's two-percent

  At the same time, material shortages linked to the pandemic have stalled
the economic recovery in parts of the eurozone.

  Eurozone business sentiment in October was at its lowest point since April,
according to an IHS Markit survey published last week, with shortages being
felt particularly in European powerhouse Germany and its vital automotive

  President Christine Lagarde has however said the ECB would not "overreact"
to what the bank's economists see as "transitory" inflation driven by one-off
pandemic effects.

  - 'Getting closer' -

  At the end of September, the heads of the world's biggest central banks
came together at the ECB's monetary policy summit to discuss the problems
facing them.

  The US Federal Reserve was "getting closer" to meeting its targets to start
winding down its own stimulus programme, its chair Jerome Powell said in a
panel discussion with Lagarde and colleagues from the UK and Japan.

  Members of its policy-making committee also expect the Fed to start raising
interest rates at the end of 2022 -- a prospect which has yet to officially
materialise at the ECB as the bank's medium-term inflation forecasts continue
to sit below its target.

  The Bank of England governor Andrew Bailey said in mid-October that his
institution "will have to act" on inflation, bringing forward expectations of
a rise in interest rates.

  Other central banks within the European Union have responded aggressively
to rising prices.

  The Polish central bank hiked interest rates at the beginning of October
for the first time in almost a decade, while its Czech counterpart raised
rates sharply in September to tame soaring inflation.

  - Zen master -

  Despite some dissent among members of the governing council, the ECB seemed
"pretty zen", said Bruno Cavalier, economist at Oddo.

  In a letter last week announcing his resignation to colleagues, Jens
Weidmann, the president of the German central bank and a prominent advocate
of tight monetary policy, said it would be "decisive" for the ECB's strategy
"not to lose sight of future inflation risks".

  Upwards pressure on prices would however "largely fade out over the course
of next year," Isabel Schnabel, who sits on the executive board of the ECB,
said earlier this month.

  The ECB has long held its interest rates at historic lows, including a
negative bank deposit rate that means lenders pay to park excess cash at the

  While markets are pricing in a small rates rise in 2022, analysts at ING
doubted that the first increase would come "before late 2023".

  The ECB's 25-member governing council left interest rates untouched, but
dialled back its bond-buying scheme at its last meeting in September.

  The 1.85-trillion-euro ($2.15-trillion) pandemic emergency bond-buying
programme (PEPP) is the ECB's main crisis-fighting tool, aimed at keeping
borrowing costs low to stoke economic growth.

  The expectation is that the scheme will end in March, but ideas are
percolating amongst observers and the central bank's policymakers as to how
existing schemes could be modified to maintain support.

  "Flexibility" had been the success of the pandemic programme, France's
central bank boss Francois Villeroy de Galhau said earlier this month.


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