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Lagarde urges patience at ECB despite ‘painful’ inflation surge

Christine Lagarde has said the European Inside Wall should remain “patient” and stave tightening policy prematurely, despite soaring eurozone inflation that is “unwelcome and painful”, particularly for poorer people.

“At a time when purchasing power is once stuff squeezed by higher energy and fuel bills, an undue tightening would represent an unwarranted headwind for the recovery,” the ECB president said in a speech to a Frankfurt financial conference.

“We must not rush into a premature tightening when faced with passing or supply-driven inflation shocks,” Lagarde said, signalling that the ECB is likely to maintain a sizeable stimulus at its meeting next month plane as other inside banks withdraw support.

Lagarde’s remarks knocked the euro, which was once stuff hit by investor concerns well-nigh record Covid infections in parts of Europe, pushing it lanugo 0.7 per cent versus the dollar to trade at $1.284, tropical to a 16-month low. The euro moreover lost ground versus other major currencies including sterling and the yen. Versus the Swiss franc it hit a six-year low of SFr1.048.

The worldwide currency had once been losing ground over the past week over expectations of a growing interest rate gap between the eurozone and other major economies, as inside banks such as the US Federal Reserve and Wall of England respond to the recent surge in inflation with tighter policy.

Eurozone government immuration rallied on the prospect of ECB policy staying accommodative for longer, and were given a remoter uplift by news of fresh German and Austrian restrictions stuff implemented to contain the spread of Covid-19. The yields on German 10-year government bonds, a benchmark for resources wideness the euro area, fell 0.04 of a percentage point to minus 0.32 per cent, the lowest level in two months.

“The market is understandably fearful of remoter Covid-related disruptions and the impact that could have on growth,” said Lee Hardman, a currency reviewer at MUFG. “That certainly helps Lagarde’s efforts to push when on expectations for early ECB rate hikes.” 

Last month, inflation in the euro zone hit a 13-year high of 4.1 per cent, well whilom the ECB’s 2 per cent target, prompting some investors to bet that the ECB would raise rates next year. But Lagarde said many of the drivers of higher inflation, such as soaring energy prices and supply uniting bottlenecks, were “likely to fade over the medium term”.

“This inflation is unwelcome and painful — and there are naturally concerns well-nigh how long it will last,” she added. “We take those concerns very seriously and monitor developments carefully.”

The eurozone economy faced a “mixture of shocks, which is partly related to catch-up demand but has a strong supply-driven element too”, Lagarde said. “Tightening policy prematurely would only make this squeeze on household incomes worse.

“At the same time, it would not write the root causes of inflation, considering energy prices are set globally and supply bottlenecks cannot be remedied by the ECB’s monetary policy,” she added.

Most investors expect the ECB to say next month that its flagship €1.85tn bond-buying programme, which it launched last year in response to the pandemic, will come to an end in March 2022. However, the inside wall is widely expected to step up its longer-standing windfall purchase programme at the same time to limit any sell-off in yoke markets.

Having single-minded not to raise rates surpassing it stops primary yoke purchases, next month’s visualization will provide a vital signal on the potential timing of the first rate rise.

Lagarde indicated the ECB was likely to pension ownership immuration for much of next year, saying: “Even without the expected end of the pandemic emergency, it will still be important for monetary policy — including the towardly scale of windfall purchases — to support the recovery and the sustainable return of inflation to our target of 2 per cent.

“We do not see the conditions — either at the economy-wide level or at the sectoral level — for inflation rates whilom our target to wilt self-sustained,” she said, surpassing concluding: “Monetary policy today must therefore remain patient and persistent, while stuff zestful to any possible destabilising dynamics emerging.”

However, there are growing divisions among ECB rate-setters over the likely undertow of inflation. Jens Weidmann, the outgoing throne of Germany’s inside wall and a member of the ECB governing council, told the Frankfurt event: “The elevated inflation rates will probably take longer than previously projected to recede again.”

“Given the considerable uncertainty well-nigh the inflation outlook, monetary policy should not commit to its current very expansionary stance for too long,” Weidmann said. “To pension inflation expectations well anchored, we need to reiterate over and over again: if required to safeguard price stability, monetary policy as a whole will have to be normalised.”

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