- According to Eurostat, inflation fell to 4.3% in September from 5.2% in August.
- This is faster than expected, but upside risks to inflation remain from wage effects and the threat of higher oil prices.
- Bond yields have risen significantly since the last ECB meeting, where only a slim majority of council members voted in favor of a rate hike, raising concerns in Frankfurt.
Christine Lagarde, President of the European Central Bank (ECB), speaks during an ECB press conference in July.
Picture Alliance | Picture Alliance | Getty Images
FRANKFURT – The European Central Bank is expected to leave interest rates unchanged at its meeting in Athens this week.
As inflation pressures ease and the economic outlook for the euro zone – the 20 countries that share the euro – worsens, the ECB will insist on keeping interest rates high for an extended period.
Given the recent volatility in the bond market, discussion of an earlier exit from the quantitative tightening program may need to be postponed.
“As inflation continues to fall, the attacks on Israel and the potential knock-on effects on the oil market pose a new upside risk to inflation,” Dirk Schumacher, ECB watcher at Natixis, said in a research note.
“At the same time, downside risks to growth have also increased, making the situation even more complicated for the ECB.”
According to Eurostat, inflation fell to 4.3% in September from 5.2% in August. This is faster than expected, but upside risks to inflation remain from wage effects and the threat of higher oil prices.
Bond yields have risen significantly since the last ECB meeting, where only a slim majority of council members voted in favor of a rate hike, raising concerns in Frankfurt.
“Rising long-term interest rates, depending on the underlying causes, and increased market volatility could therefore be the biggest challenges to the ECB’s current policy stance and its efforts to avoid a recession,” said Anatoli Annenkov, a senior European economist at Société Générale . in a preview note from the ECB.
The rise in yields could also weigh on discussions about whether to accelerate the reduction of the ECB’s balance sheet.
“Higher global bond yields and wider spreads (not least for Italy) suggest that it could be destabilizing for the ECB to accelerate QT related to the PEPP – or even to discuss the matter in detail at next week’s meeting.” said Reinhard Cluse of UBS in an email to CNBC.
PEPP (Pandemic Emergency Purchase Program) is a flexible bond purchase program introduced during the coronavirus pandemic.
“If the markets calm down again in the coming weeks and months, we still see a chance that the ECB will bring forward PEPP-QT by a few quarters at some point.”
In addition to QT, the question of how long is “higher for longer” will also be a big topic in Athens. In other words, when will they start cutting rates?
“The Governing Council will be careful not to mistakenly switch to cuts too early. We expect the first cut on September 24th. “The risk shifts to June 24,” Mark Wall, chief economist at Deutsche Bank, said in a research note.