The latest deterioration in the outlook in the growth-inflation ratio in the Eurozone is making the meeting of the European Central Bank (ECB), scheduled for this Thursday, important. Yes, because the ECB seems to find itself more and more between a rock and a hard place, between an economy that is going through a period of weakening and a pressure on prices that is increasing. This is the opinion of Martin Wolburg, Senior Economist of Generali Investments, according to which the ECB will have to calm the concerns of the market on the risk of falling behind with respect to the increase in inflation.
Not only is inflation rising sharply, but the pressure on prices is also growing more and more. The producer price component of the October Composite PMI stood at 60.3, the highest level in over a decade, while PPI inflation in July was 13.7% yoy and the compression of margins continues. Bottlenecks related to key input shortages such as semiconductors and the problems of rebuilding value chains persist. Likewise, inflation expectations across all maturities (1 year to 30 years) are currently somewhat above 2%. The risk that inflation expectations could break away from the ECB’s target has clearly increased.
“The main task of President Lagarde in the October meeting will be to calm the market’s concerns about inflation and about the fact that the ECB is waiting too long – explains the expert from Generali Investments – Lagarde will have to proceed along a fine line. to keep inflation expectations under control without being forced by the markets to take real political action “.
In a recent speech, the ECB president still assessed the inflation spike as a transitory phenomenon, but highlighted the upside risks to inflation linked to persistent bottlenecks and higher-than-expected wage growth. stating that the ECB “continues to closely monitor the risk regarding the outlook for inflation”.
“We expect these observations to also find space in the introductory statement in October, thus intensifying the tone compared to the September meeting – he concludes – (…) The implicit message will be that the threshold for raising interest rates is still far away. the lines will communicate that the (probable) upward adjustment of the inflation trajectory at the December meeting will not alter the outlook for rates and that the markets have gone too far in their expectations. ” Markets are currently pricing a deposit rate of zero at 3 years, -0.15 at 2 years and -0.43 at 1 year.