Rising Prices Tests Euro. Central Bank 10/28 06:01
European Central Bank officials are confronting the highest inflation in
more than a decade and supply shortages that are holding back the pandemic
recovery as they decide monetary policy Thursday for the 19 European Union
countries that use the euro currency.
FRANKFURT, Germany (AP) -- European Central Bank officials are confronting
the highest inflation in more than a decade and supply shortages that are
holding back the pandemic recovery as they decide monetary policy Thursday for
the 19 European Union countries that use the euro currency.
The meeting of the 25-member governing council isn't expected to result in
changes to the bank's 1.85 trillion ($2.14 trillion) bond purchase program
aimed at getting the economy through the COVID-19 pandemic.
But it could lay the groundwork for a December decision on the program that
drives down longer-term borrowing costs, easing credit for businesses and
supporting growth and jobs. The purchases are slated to run at least through
March, so any change in December would take effect next year.
A news conference from President Christine Lagarde will provide another
chance for her to underline the bank's stance on the recent burst of inflation
and what lasting effects it might have. So far, she has made it clear that the
bank considers the higher prices to be temporary and said the bank won't
"overreact" by easing its efforts to keep interest rates low for businesses,
governments and consumers.
She is expected to argue that the economy still needs extensive support. The
bloc of countries using the euro has not yet reached its pre-pandemic level of
output, unlike the U.S., which has seen a robust recovery following more
extensive government spending.
Shortages of supplies like computer chips for cars have hindered the
industrial recovery, with Germany this week lowering its growth outlook for the
year to 2.6% from 3.5%. The eurozone as a whole grew by 2.2% in the second
quarter over the quarter before, exiting a double-dip pandemic recession.
Third-quarter figures are due Friday.
Inflation in September was 3.4%, the highest since 2008, and could
eventually hit 4% later this year, but the bank's staff foresees the rate of
price increases falling to 1.7% next year and to 1.5% by 2023, well below its
target of 2%.
Rising prices have hit global economies due to higher oil costs and
shortages of goods as the world bounces back from the worst of the pandemic
Annual inflation in the U.S. reached 4.3% in August, the most in three
decades. Federal Reserve Chairman Jerome Powell has said rising prices and
supply bottlenecks are likely to be "longer and more persistent" than first
expected. But he said that it would be "premature" to raise interest rates and
that the Fed can afford to be "patient" on inflation.
Central banks typically respond to higher-than-desired inflation by raising
interest rates, tightening credit in the economy and cooling off demand that
drives prices higher.
Holger Schmieding, chief economist at Berenberg Bank, said inflation is less
pronounced in the eurozone than in the U.S., partly because the European
governments poured less stimulus money into the economy. That means the
European Central Bank can "ride out" rising prices and slower growth "more
easily than the Fed," he said.
Economists say the burst of inflation is fed by comparisons to extremely low
prices during the depths of the pandemic, a factor that should drop out of the
statistics in time. The risk however is that higher prices become embedded in
expectations for higher wages and become longer lasting. However, the struggle
in Europe in recent years has not been against high prices but boosting
inflation toward more normal levels considered best for the economy.
Frederik Ducrozet, global macro strategist at private bank Pictet, said in a
research note that "the ECB could have the luxury to wait for evidence of
inflation persistence while other central banks start to tighten, with
uncertain implications for the economy and for markets."
No change is expected in interest rate benchmarks, which remain at record
lows. The rate for European Central Bank lending to banks is zero, while the
rate on deposits left overnight by banks is minus 0.5%, meaning banks pay to
deposit the money -- a penalty rate aimed at pushing them to lend the funds