# Inflation genie out of the bottle: Five questions for the ECB Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2021-10-25 Category: BANKING Category URL: https://financedigest.com/category/banking Meta Title: ECB Meeting: Inflation Pressures & Policy Outlook Meta Description: The ECB faces tough decisions as high inflation persists. Market expectations clash with dovish policy stance. Find out more on the key questions ahead. URL: https://financedigest.com/inflation-genie-out-of-the-bottle-five-questions-for-the-ecbhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2021-10-25t064604z2lynxmpeh9o05brtroptp4eurozone-markets-ecb-1736837527982-compressed.jpg) By Dhara Ranasinghe and Saikat Chatterjee LONDON (Reuters) – The inflation genie is finally out of its bottle. Now investors are waiting to see whether the European Central Bank on Thursday admits that price pressures are too significant to ignore. They will also want an explanation of what that means for its ultra-easy policy stance. [Big decisions on the future of the ECB’s](https://www.financedigest.com/big-ecb-hike-adds-fuel-to-the-banking-sector-fire.html "Big ECB hike adds fuel to the banking sector fire") pandemic emergency stimulus will wait until December. But with surging [energy prices](https://www.financedigest.com/ecb-survey-shows-rising-inflation-expectations-despite-energy-price-falls.html "ECB survey shows rising inflation expectations despite energy price falls") and supply bottlenecks, Thursday’s meeting should be anything but dull. Here are five key questions on the radar for markets. 1/ What does high [inflation mean for the policy](https://www.financedigest.com/boes-mann-falling-headline-inflation-high-core-make-policy-difficult.html "BoE’s Mann: Falling headline inflation, high core, make policy difficult") outlook? The ECB may acknowledge that a jump in price pressures is likely to last longer than anticipated, but the central [bank is unlikely to abandon its dovish policy stance just yet](https://www.financedigest.com/swiss-national-bank-says-inflation-battle-not-yet-won.html "Swiss National Bank says inflation battle not yet won"). Its 2023 inflation forecast is 1.5%, below the 2% target, and policymakers argue that tightening policy too early could hurt the economy. [ECB Chief Economist Philip Lane has argued that the current bout of inflation](https://www.financedigest.com/big-fall-in-euro-zone-inflation-offers-little-help-for-ecb.html "Big fall in euro zone inflation offers little help for ECB") in the bloc is not a trigger for monetary policy action as growth in services prices and wages remains weak. They have to be very careful they don’t scare the horses,” said Craig Inches, head of rates at Royal London [Asset Management](https://www.financedigest.com/asset-managers-on-alert-after-whatsapp-crackdown-on-banks.html "Asset managers on alert after ‘WhatsApp’ crackdown on banks"). “If they come out a little bit on the hawkish side, certain peripheral markets could start to struggle.” Graphic: ECB and markets, https://fingfx.thomsonreuters.com/gfx/mkt/akvezajzkpr/ECB%20and%20markets.JPG 2/ What about the mismatch between the [ECB’s guidance and market pricing on interest rates](https://www.financedigest.com/morgan-stanley-others-now-forecast-4-peak-for-key-ecb-rate.html "Morgan Stanley, others now forecast 4% peak for key ECB rate")? Indeed, [rate-hike expectations](https://www.financedigest.com/hawkish-ecb-comments-push-up-rate-hike-expectations.html "Hawkish ECB comments push up rate-hike expectations") have shot up in recent weeks and markets are pricing in a 10 basis-point rate rise by the end of 2022. This is out of sync with the [ECB’s ultra-loose monetary policy stance and is a concern if higher market lending rates](https://www.financedigest.com/stocks-euro-gain-amid-divergent-fed-ecb-rate-hike-outlooks.html "Stocks, euro gain amid divergent Fed, ECB rate hike outlooks") trigger tighter financial conditions. The aggressive re-pricing is mostly a spillover from a sharp readjustment in Britain and the United States where investors are now expecting tighter policy. Lane has already pushed back against the market pricing; ECB chief Christine Lagarde may do the same on Thursday. We expect the ECB to remain dovish, while markets may continue to hedge against an earlier tightening by the [ECB,” said Societe Generale senior European](https://www.financedigest.com/energy-stocks-boost-european-shares-ahead-of-ecb-minutes.html "Energy stocks boost European shares ahead of ECB minutes") economist Anatoli Annenkov. Graphic: Global money markets raise central [bank rate hike](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks") bets  Global money markets raise central bank rate hike bets , https://graphics.reuters.com/GLOBAL-MARKETS/klvykzkylvg/chart.png 3/ Where will [inflation settle once price pressures](https://www.financedigest.com/oil-prices-dip-on-u-s-crude-reserve-release-inflation-pressure.html "Oil prices dip on U.S. crude reserve release, inflation pressure") abate? For some policymakers, [changing inflation](https://www.financedigest.com/stocks-dollar-little-changed-as-inflation-data-sends-mixed-signals.html "Stocks, dollar little changed as inflation data sends mixed signals") dynamics cannot be ignored. So what the [ECB says](https://www.financedigest.com/digital-euro-will-be-free-but-limited-in-scope-ecb-says.html "Digital euro will be free but limited in scope, ECB says") about where it expects inflation to settle will be watched closely. Bundesbank President Jens Weidmann, a critic of the ECB’s ultra-easy monetary policy, again warned of inflation risks last week as he announced his plan to step down [early at the end](https://www.financedigest.com/analysis-investors-stick-to-bets-on-early-end-to-ecb-hikes-as-uncertainty-grows.html "Analysis-Investors stick to bets on early end to ECB hikes as uncertainty grows") of December. [Euro zone inflation](https://www.financedigest.com/euro-zone-consumers-more-optimistic-on-inflation-ecb-survey-shows.html "Euro zone consumers more optimistic on inflation, ECB survey shows"), at 3.4%, is at its highest level since 2008 and is expected to approach 4% by year-end. One key issue is what happens if [inflation expectations rise](https://www.financedigest.com/shares-rise-but-concern-mounts-over-inflation-flare-up.html "Shares rise, but concern mounts over inflation flare-up") above target and signs of second-round effects on wages emerge. Graphic: Eurozone inflation, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjolqonpr/eurozone%20inflation.JPG 4/ What about the risks to the [economic outlook](https://www.financedigest.com/analysis-russians-feel-little-economic-pain-now-long-term-outlook-darkens.html "Analysis: Russians feel little economic pain now, long-term outlook darkens")? Supply bottlenecks and [surging energy prices mean economic headwinds have grown stronger since the September ECB](https://www.financedigest.com/explainer-oil-price-surge-changes-ecb-narrative-only-at-the-margins.html "Explainer-Oil price surge changes ECB narrative only at the margins") meeting. Germany is already feeling the strain of supply-chain bottlenecks and its top economic institutes just [cut their joint forecast](https://www.financedigest.com/traders-cut-ukraine-2022-combined-grain-and-oilseeds-crop-forecast.html "Traders cut Ukraine 2022 combined grain and oilseeds crop forecast") for 2021 growth to 2.4% from 3.7%. And while higher energy [prices are an upside risk to inflation](https://www.financedigest.com/uk-shop-price-inflation-hits-record-8-in-january-brc.html "UK shop price inflation hits record 8% in January: BRC"), they also squeeze consumers’ purchasing power and company profits. We are still waiting for more people at the [ECB to acknowledge those significant downside risks](https://www.financedigest.com/high-inflation-recession-risk-widen-ecb-dilemma.html "High inflation, recession risk widen ECB dilemma") to growth,” BofA analysts said. Graphic: Supply chain shortages, https://fingfx.thomsonreuters.com/gfx/mkt/jnvwewkeovw/supply%20chain%20shortages.JPG 5/ Will we get a sense of what comes after the PEPP? A decision on what comes after the 1.85 trillion euro pandemic emergency purchase programme (PEPP) expires next March is [expected in December](https://www.financedigest.com/ecbs-makhlouf-expects-50-bps-rate-hike-in-december.html "ECB’s Makhlouf expects 50 bps rate hike in December"), and a debate on what will follow is under way. The ECB should keep some of the [flexibility offered](https://www.financedigest.com/britain-urges-banks-to-offer-mortgage-flexibility-in-cost-of-living-crisis.html "Britain urges banks to offer mortgage flexibility in cost-of-living crisis") by the PEPP when it returns to more conventional policy, ECB policymaker Francois Villeroy de Galhau believes. According to one recent report, the ECB is studying a new bond-buying scheme to prevent market disruption when the PEPP ends, complementing an existing open-ended 20 [billion euro-a-month asset](https://www.financedigest.com/french-asset-manager-amundi-posts-q3-outflows-of-13-billion.html "French asset manager Amundi posts Q3 outflows of billion") purchase programme. Graphic: Life after PEPP, https://fingfx.thomsonreuters.com/gfx/mkt/zgpomrymxpd/life%20after%20PEPP.JPG (Reporting by Dhara Ranasinghe and Saikat Chatterjee; Additional reporting by Tommy Wilkes; Editing by Hugh Lawson) --- This blog is powered by Superblog. 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