FRANKFURT, Oct 29 (Reuters) – The European Central Bank left interest rates unchanged in a well-telegraphed move on Thursday but maintained expectations for another hike in December with a warning that high and rising energy costs were fuelling inflation risks.
The ECB has raised rates twice this year to prevent an Iran war-induced energy price jump from becoming entrenched and has signalled that more may be needed, even if it was not in a hurry without evidence of dangerous second-round inflation effects.
In a decision published only hours after ECB President Christine Lagarde announced she would step down early, the ECB warned risks to inflation were skewed to the upside given a recent surge in oil and gas prices.
“Energy prices have continued to rise, posing upside risks to the inflation outlook and downside risks to the growth outlook,” the ECB said in a statement.
Lagarde repeated during her post-meeting press conference that underlying inflation had remained broadly stable and wages had not shown “a material response” to higher prices although “the increased magnitude and duration of the energy shock” were likely to drive up inflation and undermine growth.
It meant that data and developments over the six weeks before the ECB’s final meeting of the year would be key.
“The interim meeting period will be information-rich,” Lagarde said. “That will actually help us determine whether the situation that we see now, which could have warranted a hike, is going to be confirmed, and in that case the sense of direction is quite clear.”
FRANCE DEBT MARKET TENSIONS
Lagarde’s resignation comes as the ECB is battling to prevent high global energy prices developing into a longer-term inflation problem for the euro zone.
It is also having to contend with sharp rises in government borrowing costs — especially in debt-laden France — that have triggered questions about whether it would step in if the market moves threatened to get out of control.
“Should market developments threaten the smooth transmission of our monetary policy, including through unwarranted and disorderly market movements, we have instruments available to respond,” Lagarde said.
Economists have warned the increase in borrowing costs is likely to curb the flow of credit and slow the economy. France is now having to pay a decades-high 155 basis point premium over Germany to borrow for 10 years.
“Financing conditions have tightened since the Governing Council’s last meeting, which is likely to weigh on inflation and growth,” the ECB’s statement said.
The central bank will have to walk a narrow path in the months ahead.
Lagarde said that bond market yields were likely to stay high for heavily indebted euro zone members, which the ECB needed to take into account.
While it must prevent high inflation from becoming embedded — price growth is already twice its 2% target — the ECB also wants to avoid setting off turbulence in markets that could induce a recession or broader financial instability.
This is why the vast majority of economists polled by Reuters see just one or two more hikes before the current tightening cycle ends.
“What is driving us is the price stability mandate that we have,” Lagarde said.
(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Catherine Evans)
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