Will the ECB Maintain Its Eased Monetary Policy?

ECB to Hold Monetary Policy Meeting on the 28th
Inflation Remains Burdensome... Limited Rebound in Service Prices

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Gong Byung-sun] The European Central Bank (ECB), which is about to hold a monetary policy meeting, is expected to maintain its accommodative monetary policy. Although prices are rising, it is likely to judge that the situation is still manageable.

According to Kiwoom Securities on the 23rd, the ECB is scheduled to hold a monetary policy meeting on the 28th (local time). At last month's monetary policy meeting, the ECB announced it would maintain an accommodative monetary policy, and market attention is focused on whether it will maintain this stance again this time.

Last month, President Lagarde emphasized that although the scale of bond purchases was reduced, this should not be seen as asset purchase tapering. In particular, she borrowed the famous phrase from former UK Prime Minister Margaret Thatcher, “The lady's not for turning,” by saying, “The lady does not do tapering.”

However, with recent interest rate increases, moves toward normalization of monetary policies in major countries have been observed. On the 17th (local time), Andrew Bailey, Governor of the Bank of England (BOE), said, “I believe inflation is temporary,” but also stated, “If inflation continues due to energy shortages and supply chain disruptions, the BOE must take action.” This hinted at the possibility of interest rate hikes due to inflation. New Zealand also raised its benchmark interest rate from 0.25% to 0.5% for the first time in seven years as the inflation rate rose to 4.9%.

The Eurozone is also facing burdensome price levels. The Eurozone's prices have already begun to exceed the levels seen between 2016 and 2018. The consumer price index for September rose 3.4% year-on-year, higher than the 3% level in August.

Nevertheless, the ECB is expected to continue its accommodative monetary policy. This is because the rebound in service prices is limited. The year-on-year increase rate of service prices in September was 1.7%, higher than August's 1.0%, but still below the level at the end of 2019. In fact, service prices have never exceeded 2% since 2010.

Kiwoom Securities researcher Ahn Ye-ha explained, “The ECB will continue to be patient and maintain an accommodative stance,” adding, “Volatility in the bond market will be low until before the U.S. Federal Open Market Committee (FOMC) meeting.”

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