MNI STATE OF PLAY: ECB To Push Back Against Hike Speculation

European Central Bank President Christine Lagarde is likely to push back against market expectations for a 2022 rate hike after Thursday’s meeting despite a surge in inflation, but will stress that policymakers are playing close attention to incoming data and will be flexible if necessary.

With little appetite among Governing Council members for changes to policy so soon after December’s major announcements and before March’s economic projections, Lagarde will also be unlikely to signal any reduction in the planned pace of the Asset Purchase Programme, which is due to increase to EUR40 billion a month in the second quarter.

The president underlined the ECB’s commitment to price stability in early January, and its readiness to act was underlined by chief economist Philip Lane in an interview in which he appeared to suggest December’s significantly revised macro projections -- which put euro area headline inflation averaging 3.2% in 2022 -- may be out of date. At the same time he restated the belief that inflation will fall over the course of this year before settling around 2%, with staff projections at 1.8% in 2023 and 2024.

ECB officials see very little chance of rate hikes this year, even as eurozone unemployment fell to a record low 7.0% in December alongside higher inflation prints and economies open up after the Omicron wave of Covid. Pay increases remain subdued, with soaring energy costs likely to keep real wages depressed and consumer spending on a leash.

However, much uncertainty remains, including the ongoing tension over Ukraine.