- ECB President Lagarde says higher energy prices, strong demand and German VAT are behind inflation.
- Prices pressures should ease in 2022 according to Lagarde.
- The pledge to maintain favorable financing conditions is in contrast with other central banks.
Will 2022 be like 2019? That is what many people are hoping for, after nearly two years with covid. Hopes for next year also seem to guide the European Central Bank, which is why EUR/USD has room to lose its recent gains – related to weak US GDP.
ECB President Christine Lagarde cited three critical factors that have pushed inflation higher:
- Soaring energy prices: Spain's 5.5% annual inflation rate is mostly driven by a surge in natural gas prices. Other countries are struggling as well, from both gas and oil costs.
- High demand: The rebound has been stronger than expected – which is a good thing – and that should also cool down later on.
- German skew: Germany temporarily cut its Value Added Tax (VAT) rate in response to the pandemic, and its expiry has pushed prices higher. That effect should wane in early 2022.
While Lagarde acknowledges that inflation will run hotter for longer, she reiterated her stance that it will cool in 2022.
Moreover, the ECB is set to keep pumping more money into markets – by refraining from any tapering of its bond-buying scheme. The current Pandemic Emergency Purchase Program (PEPP) is set to slow down, however, a new scheme will probably be announced in December.
Perhaps the most dovish factor is Lagarde's pushback against markets' expectations of a lift-off – raising rates. She continues to categorically rejecting hikes.
Overall, rejecting inflation, tapering and rate hikes is a potently dovish mix.
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