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MNI STATE OF PLAY: Lagarde To Push Back Vs Rate Expectations

The ECB's Christine Lagarde will look past inflation fears in a holding meeting ahead of December's crunch decisions.

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European Central Bank President Christine Lagarde will push back against market expectations for rate hikes after the Governing Council's meeting on Thursday, but major decisions on the future of stimulus following the scheduled conclusion of the Pandemic Emergency Purchase Programme in March will be left until December.

Lagarde will likely echo Philip Lane's recent assertion that markets have not fully absorbed the ECB's forward guidance on rates, and insist that the current surge in inflation is transitory.

At the same time, she will indicate that neither she nor the Governing Council is blind to upside risks to the ECB's baseline medium-term projection that shows headline inflation peaking next year, before embarking on a steady downward trajectory to 1.5% in 2023.

Policymakers are not expected to deliver a comprehensive answer to what happens following the conclusion of the PEPP's net purchase phase. A Flexible APP, TLTROs and tiering - but not rate hikes - are all on the table, but no decisions are expected before Eurosystem staff macroeconomic projections in a few weeks' time.

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Lagarde may also emphasise the potential impact on consumer confidence of those price rises, notably energy, while stressing their connection to short-term supply side issues. While the Fed and the Bank of England may be preparing to tighten, she will indicate that the ECB is content to stay behind the curve.

Growth may in any case be slowing. The Governing Council will monitor closely any signs of sustained tightening in financing conditions, while stressing that the overall direction of travel is positive.

The overall risk outlook remains broadly balanced, but signs of an uptick in Covid infections across Europe highlights the fragility of the recovery and the continued necessity of expansionary monetary policy, as Lagarde will point out.

An interesting line of questioning may come from journalists eager to learn more about Bundesbank president Jens Weidmann's decision to step down for personal reasons at the end of the year. Thursday's press conference is unlikely to pass without a fulsome tribute to the German, whose "pragmatic" contribution to monetary policy debates, and in particular to the ECB strategy review, the president has already praised.