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Published on Tuesday, November 2, 2021

Europe | Inflation, inflation

These were the words of Christine Lagarde, when she began to field the round of questions at last Thursday's press conference after the European Central Bank's (ECB) monetary policy meeting — giving the impression that this had been the main topic of discussion.

Key points

  • Key points:
  • Prolonged supply constraints, combined with high energy prices and the base effect has seen eurozone inflation rise to 4.1% — with core inflation standing at 2.1%.
  • The ECB is maintaining its stance that, although supply chain bottlenecks could continue longer than initially anticipated, inflationary pressures are only temporary and are expected to disappear in the course of 2022.
  • This is a reasonable diagnosis, especially taking into account that there have been fewer fiscal stimulus packages in Europe than in the United States. And the ECB, like other central banks, has gained a solid reputation which ensures the anchoring of inflation expectations.
  • In any case, the market continues to price in rate rises at the end of 2022—too soon, in our opinion—clearly disconnected with the ECB’s view as Lagarde was trying to convey.
  • December will be key, not only because a decision will be made on asset purchase programs—the pandemic emergency one ends in March—and liquidity lines, but because the central bank will update its inflation forecasts.

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