Lagarde’s Half-Hearted Pushback Leaves ECB Hike Bets Alive
Lagarde Pushes Back Against Bets for ECB Rate Hike Next Year
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European Central Bank President Christine Lagarde’s bid to drive home a commitment to ultra-loose monetary policy fell short on Thursday as investors kept alive bets for interest-rate hikes as soon as next year.
“Our analysis certainly does not support that the conditions of our forward guidance are satisfied at the time of liftoff as expected by markets, nor any time soon thereafter,” she told reporters in a prepared remark during a virtual press conference in Frankfurt, before later adding: “Are markets ahead of themselves? Not for me to say.”
Those comments followed an assessment by Lagarde that no longer labeled surging inflation as “temporary” and acknowledged it will last longer than originally anticipated, in the wake of a discussion where officials debated the risks of exceeding the ECB’s 2% target in 2023.
Investors held onto bets that the ECB will have raised interest rates at least once come next September, a move that would amount to a dramatic switch in stance from the ultra-loose emergency settings that policy makers have pledged to keep in place until March.
“It was hard for Lagarde to give a credible pushback against market pricing after saying the sole focus of this meeting was inflation,” said Antoine Bouvet, a strategist at ING Groep NV. “She also hesitated when given another opportunity. Taken together, it is not enough to put markets off questioning the ECB’s forward guidance.”
Lagarde’s encounter with reporters was within hours of investors doubling down on bets of hiking. While that may reflect a global environment where central banks from the U.K. to New Zealand are pivoting fast toward tightening, the ECB president said such comparisons were “odious.”
“The outlook is different, the level of inflation that they have is different, some of them are either at or above target already,” she said.
While the decision on Thursday was slated as a quiet prelude to December’s showdown over the future of emergency stimulus, Lagarde suddenly found herself in the spotlight of market attention with a flurry of rate bets that seemed to question the ECB’s commitment to ultra-low interest rates.
What Bloomberg Economics Says...
“Higher inflation is unlikely to persist as long as significant slack remains in the labor market. And, once the unemployment rate is adjusted for people on furlough, it remains considerably above its pre-pandemic level.”
--David Powell and Maeva Cousin. Read the ECB REACT.
Money markets trimmed rate-hike bets only slightly after she spoke, betting on 17 basis points of tightening by the end of next year compared with 21 basis points during the press conference.
Government bonds extended their decline, with the yield on Italian 10-year securities rising 12 basis points to 1.06%. The euro erased losses, trading 0.7% higher against the dollar at 1.1680.
“She was probably too timid on her push back of market pricing, but ultimately it is inconsistent with the ECB’s forward guidance,” said Imogen Bachra, a rates strategist at Natwest Markets. “Clearly inflation is less transitory than they first thought, but she was still dovish in emphasizing that higher price pressures now could risk the recovery.”
Lagarde spoke after the publication of data showing inflation accelerated to 5.5% in Spain, a faster-than-anticipated 4.6% in Germany, and a survey showing price expectations in the euro-zone have reached the highest since 1993.
ECB policy makers expect inflation to exceed 2% target next year but hold different views on whether it will stay there in 2023, according to people familiar with the talks.
On Friday, more statistics will be released including the euro-zone report, which economists expect to show an outcome of 3.7%, the fastest in 13 years.
The ECB attributes half of the acceleration to energy prices, but says that the region’s post-pandemic is also playing a part.
“Recovering demand related to the reopening of the economy is outpacing supply,” Lagarde said. “While the current phase of higher inflation will last longer than originally expected, we expect it to decline in the course of next year.”
Policy makers opted to keep in place their current pace of emergency bond purchases, in a decision that is just a prelude to December, when they must determine the future of stimulus after their 1.85 trillion-euro program, known as PEPP.
“At this point in time, I expect PEPP to end at the end of March,” Lagarde said. “Whether we will use the full envelope or not is to be seen.”
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