At the European Central Bank's October policy meeting to be held tomorrow, we expect the content of the policy statement and press conference to take into account the risk balance regarding high inflation dynamics and its permanence for a certain period of time. In this context, we expect it to be an MPC where the latest inflationary pressures are reviewed and the regulation of asset purchases is the main subject. In this context, we will look at how much Lagarde will weight her view that recent inflation spikes are unlikely to continue.
Considering that the possibility of a higher than expected peak inflation is the subject to be considered by the board; In March, when the Pandemic Emergency Purchase Programme, where priority adjustment will be made, will end, it is possible to consider as an option to adjust the monthly bond buying rate through the Asset Purchase Program. In this context; Decreasing the pace of purchases will look at the pace of inflation, while the continuation of the supportive policy will look heavily at the temporary factor in price increases or the laxity in the labor market. The ECB will likely lay the groundwork for major asset purchase decisions in December in its announcement tomorrow. The Bank will continue to see the risks to the economy as “generally balanced”. However, the ECB is not expected to take any action, at least until its December meeting, when new projections are expected.
Energy costs alone could soon create enough price pressure for core inflation to exceed the ECB's 2% target. We observe that euro area inflation has been climbing since the September ECB meeting and the euro area composite PMI continues to reflect high price pressures. We expect the pressure of high price hikes facing the currency bloc to be challenging, but the risks to the recovery in growth dynamics are also subject to opposing views on an immediate policy adjustment. If policymakers become more aware that inflation may be more persistent than anticipated, it will be necessary to read the details of this in the policy statement. Markets will be willing to digest any rhetoric about the durability of recoveries and the temporary nature of inflationary pressures.
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