The European Central Bank’s chief economist said there were “strong reasons” for inflation to decline in Europe next year, adding to policymakers’ resistance to market expectations of a rate hike in the euro zone next year.
Philip Lane said the eurozone is in a “completely different” position to other countries like the US and the UK, where central banks have announced that they will stop buying bonds and will likely start raising rates soon.
Driven by a renewed increase in demand, bottlenecks in the supply chain and rising energy prices, inflation in the eurozone reached a 13-year high of 4.1 percent in October, well above the ECB’s target of 2 percent.
“This period of inflation is very unusual and temporary and not a sign of a chronic situation,” said Lane.
“There are strong reasons to believe that inflation will fall next year,” he added in an interview with the Spanish newspaper El País.
The ECB is preparing to decide in December how much incentive it will give over the next year through bond purchases and cheap loans to banks. Lane contrasted his decision with recent announcements by the US Federal Reserve and the Bank of England that they will “cut” their asset purchases to zero.
“We believe the euro area is nowhere near in a position where we end asset purchases,” he said, pointing out that inflation in continental Europe has been persistently low for much of the last decade and the US and Great Britain “greater” inflation risk of over 2 percent in the medium term.
Eurozone government bond yields climbed to their highest level in more than a year this month after investors felt ECB President Christine Lagarde missed an opportunity to beat market expectations of a rate hike in 2022.
Yields have since fallen as Lagarde and several Governing Council members were confident that inflation would fall over the next year, making a rate hike “very unlikely” in 2022. Italian 10-year bond yields rose to a 16-month high of 1.25 percent at the beginning of the month, but stood at 0.89 percent on Monday.