MADRID: Eurozone inflation will come down next year, even if it’s slower than previously thought, suggesting that the conditions for an interest rate hike in 2022, which markets have anticipated for October, will not be met, European Central Bank policymakers said on Friday.
With annual inflation at a 13-year high of 4.1%, more than double the ECB’s target, the bank faces pressure to tighten policy. Markets have forecast a 10 basis point hike in the deposit rate next year, a move policymakers have spent the past week pushing back.
Echoing comments from ECB President Christine Lagarde and board member Isabel Schnabel, with policymakers speaking on Friday including Vice President Luis de Guindos, Austrian Robert Holzmann and Greek Yannis Stournaras have all said inflation will come down next year.
Holzmann, one of the more conservative members of the governing council charged with setting rates, said that a rate hike in 2022 could even be counterproductive and that, based on the bank’s current guidance, such a decision is unlikely.
But de Guindos also said inflation was falling more slowly than previously thought, with the risk that some of the price pressure would become more lasting.
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“It is essentially and mainly transient, but if the supply disruptions last longer than expected, it can affect the speed and intensity of the price drops,” he said during an event at Madrid.
“It is therefore essential to monitor the second round effects, which have not yet occurred in the labor market but which could start to occur,” he added.
Holzmann also noted that if housing costs were included in the inflation data, price growth could be 0.5 percentage points higher than currently believed, a potentially significant difference.
Housing costs, not fully included in headline inflation, were once thought to add 0.2 to 0.3 percentage points to inflation, but Holzmann’s comments suggest that cheap credit accelerates domestic inflation. housing more than you think.
Such an impact is important because it could reduce the need for stimulus from the European Central Bank, which has done everything in recent years to lift the anemic price growth.