Inflation is rising faster than expected in the eurozone, supply chain disruptions and product shortages are driving up costs for manufacturers and there are early signs that the economic recovery is slowing down.
It’s a fabrication that is likely to divide European Central Bank policymakers on Thursday as they consider when to slow down and end the massive bond-buying program.
Analysts expect the bank to announce a slight slowdown in the pace of its pandemic-era bond-buying program, which will buy about €80 billion, or $95 billion, of mostly government bonds each month. The program, which started in March 2020 as the pandemic spread across Europe, aims to buy a total of €1.85 trillion in bonds and will run until at least March next year. The delay would ensure purchases finish on schedule.
Other policy decisions are expected to remain unchanged, including keeping interest rates below zero and maintaining the size of the bank’s other bond-buying program, which was restarted in 2019 to deal with a regional recession.
The decisions will be the first test of the central bank’s updated forward guidance. In July, policymakers said they were willing to overlook short-term jumps in inflation and raise interest rates only once it was clear that annual inflation would reach 2 percent “well before” the end of the central bank’s projection horizon and around the end of the central bank’s projection horizon. that level in the medium term.
New forecasts for inflation and economic growth will be released on Thursday. Previous forecasts, in June, predicted that inflation would peak at 2.6 percent in the fourth quarter and fall to 1.5 percent in 2022 and 1.4 percent in 2023.
But inflation has already climbed to 3 percent in August, the highest in nearly 10 years, the region’s statistics agency said last week. So far, policymakers have bet that the rise in inflation will be temporary, like other central banks around the world.
In recent years prior to the pandemic, inflation was below the bank’s 2 percent target.
“The stars are much better aligned than they have been for a long time to bring inflation back to 2 percent,” said Klaas Knot, the governor of De Nederlandsche Bank and member of the European Central Bank’s executive board. last week.
He said markets could expect a policy decision that would mean the pandemic bond-buying program would end in March, implying “a slowing of the pace of buying.” Jens Weidmann, the head of the German central bank, said policymakers should not ignore the risk of “excessively high inflation” and that they should “not hold on too long to our very loose monetary policy stance”.
But the European Central Bank as a whole has been more cautious than the Federal Reserve and the Bank of England in preparing markets for a return to normal policy. As the economy recovers – up 2.2 percent in the second quarter from the first three months of the year – central bank president Christine Lagarde emphasizes the uncertainty that has fueled the spread of the Delta variant. entails.
Recently, Philip 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 intractable than expected.
Silvia Ardagna, an analyst at Barclays, said the central bank would try to convince markets that a slowdown in asset purchases under its pandemic relief program was “due to much better growth and inflation prospects” rather than beginning to scale down its overall bond purchases to zero.
“Challenging communication, but the ECB is likely to continue to play the tune of ‘long loose’,” Ms Ardagna wrote in a note.