ECB policymakers, accounts dampen near-term rate hike bets

ECB Policymakers Temper Near-Term Rate Hike Bets as Inflation Trends Ease

Policymaker Perspectives on Inflation and Rate Hikes

By Balazs Koranyi

FRANKFURT, Oct 8 (Reuters) - Euro zone inflation could go higher than already-elevated projections, but policymakers dampened near-term rate hike bets on Thursday, arguing that underlying trends reveal a more benign picture.

Recent ECB Rate Actions and Market Expectations

The ECB raised interest rates twice this summer and markets are betting on two or three more moves as inflation is already almost twice the bank's 2% target and could still go higher as expensive energy bites.

Comforting Price Trends Emerge

A long list of policymakers speaking in different corners of Europe all pointed to some comforting price trends, however, suggesting that they are not in a rush to hike again. 

They argued that all of the inflation surge was due to higher energy prices, and said dangerous second-round effects that could prolong inflation have been negligible.

Long-Term Expectations and Policy Implications

Longer term price expectations remain firmly anchored while higher yields on European government bonds and waning support from fiscal policy will all weigh on price growth in the months ahead, the policymakers added. 

"More stable behaviour of core inflation provides some reassurance that broader inflationary pressures remain contained," Slovenian central bank chief Primoz Dolenc told Reuters. "As regards to second-round effects from high energy inflation to wages, we haven't seen that yet." 

Greece's Yannis Stournaras and the Netherlands' Olaf Sleijpen both said medium- and longer-term inflation expectations, which are most relevant for the ECB, remain well anchored around the target. 

"This is good. So we should take this into account and be moderate in our monetary policy," Stournaras told a financial conference in Istanbul.

Fiscal Policy and Economic Outlook

ECB chief economist Philip Lane, speaking in London, argued that support from fiscal policy, a key factor in relatively robust economic growth this year, is likely to wane in 2027, dampening both expansion and inflationary pressures.

Meeting Accounts and Market Reactions

Accounts released on Thursday of the ECB's September 9-10 policy meeting nevertheless showed all policymakers agreed that inflation risks are skewed towards even higher readings given exceptional volatility in energy and pervasive uncertainty. 

The comments appear consistent with the finding of a Reuters poll, which showed that nearly all of the 73 economists surveyed see the ECB on hold this month, with the vast majority anticipating a move only in December. 

Future Policy Decisions

"Persistently elevated inflation that we see in our September projection and the lack of resolution of conflicts in the Middle East, Ukraine and elsewhere, supports the case for moving policy rates towards a more restrictive territory," Dolenc said. 

"But when and by how much we will determine on a meeting-by-meeting basis, based on the incoming data."

(Reporting by Balazs KoranyiEditing by Gareth Jones and Catherine Evans)