Lane and Lagarde losing investor confidence in ECB's interest rates argument

With inflation spiking, stoked by supply bottlenecks and rising energy, investors are betting that global momentum for withdrawal of monetary stimulus will soon enough pull the ECB in its wake

ECB chief economist Philip Lane's suggestions of no rate hikes this year have been ignored by financial markets. File picture

ECB officials have some convincing to do about their commitment to rock-bottom interest rates, at a time when investors are growing sceptical.

Financial markets have stubbornly ignored recent warnings from ECB policymakers – including chief economist Philip Lane – that they’re wrong to anticipate a rate hike at the end of next year. 

The task of persuading people otherwise will fall to ECB president Christine Lagarde as she presents the governing council’s latest decision on Thursday.

With inflation spiking, stoked by supply bottlenecks and rising energy, investors are betting that global momentum for withdrawal of monetary stimulus as espoused by the Federal Reserve will soon enough pull the ECB in its wake.

That notion has been fed further by a public debate among officials wondering how to transition from emergency bond purchases, despite the institution’s new low-rate pledge established after Ms Lagarde’s strategy review refocused minds on lacklustre price increases.

Back in September, she suggested that financial-market speculation of some eventual tightening in the future was broadly on track. Since then, amid more evidence of inflation, investors started bringing forward expectations for a liftoff in rates. 

Data on Friday is expected to show consumer-price growth in the eurozone further approaching 4%, twice what the ECB aims to reach in the medium term. So far, policymakers have insisted that is largely transitory.

Forecasts show inflation slowing

The ECB’s latest forecasts show inflation slowing to 1.5% in 2023 – not enough to justify higher rates based on policymakers’ latest manual that says forecasts must show price pressures at 2% for some time before such a step can be considered.

“It’s challenging to reconcile some of the market views with our pretty clear rate forward guidance. Various governing council members have been indicating [that] markets may not have fully absorbed rate forward guidance," Mr Lane said last week.

Now that rate-hiking bets have kept surging, it’s unlikely Ms Lagarde can still be as sanguine. If such a trend continues, along with a broader tightening of financial conditions guiding policy decisions, it risks curtailing the ECB’s room to gradually phase out crisis support and move to more standard ways of supporting the economy.

“It makes sense for the ECB to be focusing its discussion on the balance sheet, rather than rates at this stage,” said Mohammed Kazmi, a portfolio manager at Union Bancaire Privee.

• Bloomberg