The European Central Bank kept policy unchanged as expected on Thursday, curbing stimulus over the coming months but maintaining plenty of support for the economy even after inflation unexpectedly hit a fresh record high.
After the ECB extended support measures only in December, policy change was not expected to be on the agenda. But stubbornly high inflation - which rose to 5.1% last month in the 19-country euro zone - is complicating life for the bank and ECB President Christine Lagarde will be under pressure to address the issue in her 1330 GMT news conference.
Making only the smallest change to its statement, the ECB removed a clause stipulating that its next policy move could be in "either direction".
"The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term," the ECB said.
"Flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability," it added.
The ECB has long argued that inflation will soon abate without its intervention and actually fall below its 2% target by the end of the year, so that withdrawing support now would be counterproductive.
But a growing number of policymakers question this narrative, especially since the ECB has persistently underestimated the current spike, forcing it to repeatedly revise its forecasts.
Markets already doubt the ECB projections and are pricing in 28 basis points of rate hikes this year, despite the bank's insistence that any move in 2022 is very unlikely.
The issue is that inflation is forecast to dip below its 2% objective in 2023 and 2024, so that even a small increase in the inflation path could put price growth right on target, reducing the need for stimulus.
In her news conference, Lagarde could offer a nod to inflation risks while emphasizing that the base case is still for price growth to slow sharply late in the year, as wage growth in the euro zone remains muted and one-off factors fade.
She is also almost certain to repeat that any rate move this year is very unlikely, even as global peers like the U.S. Federal Reserve and the Bank of England tighten policy.
ECB watchers are nevertheless moving forward their rate hike predictions, with many now expecting a first move in early 2023 rather than late next year.
With Thursday's decision, the ECB's deposit rate remains at a record low -0.5% and the bank on course to phase out its 1.85 trillion euro pandemic emergency bond buying scheme by the end of March.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)
Dear Reader,
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.
Digital Editor
RECOMMENDED FOR YOU