Lagarde and Weidman clash over how to deal with soaring inflation

The governor of the Bundesbank warned that inflation may remain above the European Central Bank’s target for longer than expected and may need to reduce stimulus measures, which has triggered a conflict of monetary policy in the euro zone.

Jens WeidmanThe outgoing German central bank governor and member of the European Central Bank Management Committee said at a banking conference in Frankfurt on Friday: “Given the considerable uncertainty surrounding the inflation outlook, monetary policy should not stick to its current expansionary stance for a long time. “

A few hours ago, when the President of the European Central Bank stated in the same incident that interest rate setters should be “patient” to avoid Tighten policy prematurely, Despite the soaring inflation in the euro zone “unwelcome and painful.”

Lagarde said: “When faced with premature or supply-driven inflationary shocks, we must not rush to adopt premature austerity policies.” She expects the European Central Bank to maintain large-scale stimulus measures at its meeting next month. Other central banks Reduce support.

Their speeches exposed the differences between the European Central Bank’s interest rate setters before next month’s meeting, when they will decide how many bonds to buy next year and issue a new inflation forecast, which will provide investors with information on how close they are to raising interest rates. Important clues.

The European Central Bank is increasingly different from other major central banks, such as the Federal Reserve and the Bank of England, which responded to the recent surge in inflation by promising to tighten policy.

Christine Lagarde, President of the European Central Bank, said at a banking conference in Germany: “In the face of past or supply-driven inflation shocks, we must not rush to adopt premature austerity” © Kai Pfaffenbach /Reuters

Eurozone inflation takes a hit A 13-year high The interest rate in October was 4.1%, well above the European Central Bank’s 2% target, prompting some investors to bet that the European Central Bank will raise interest rates next year. But Lagarde said that many of the drivers of inflation, such as soaring energy prices and supply chain bottlenecks, “may fade in the medium term,” which means that “the conditions for raising interest rates next year are extremely unlikely to be met.”

“At a time when purchasing power is already being squeezed by rising energy and fuel costs, excessive austerity will pose an unnecessary headwind to economic recovery,” she added.

Lagarde’s comments hit the euro, which has been hit by investor concerns about limiting the record Covid-19 infection in parts of Europe. The euro fell 0.7% against the dollar to 1.284 US dollars, close to a 16-month low, and fell against other major currencies such as the pound sterling and the yen. Against the Swiss franc hit a six-year low of 1.048 Swiss francs.

Eurozone government bonds rose due to the prospect that the European Central Bank’s policy would remain accommodative, and were further boosted by relevant news New German and Austrian restrictions It is being implemented to curb the spread of the coronavirus. The yield on German 10-year government bonds, the benchmark for Eurozone assets, fell 0.04 percentage points to minus 0.32%, the lowest level in two months.

Lee Hardman, a currency analyst at MUFG, said: “Understandably, the market is concerned about further Covid-related disruptions and the possible impact on growth.” “This will undoubtedly help Lagarde’s efforts to overthrow the European Central Bank’s early interest rate hike expectations.”

The German central bank president expressed doubts about the European Central Bank’s forecast that inflation will fall below the 2% target in the next few years. “The rise in inflation may take longer than previously expected to fall back again,” Weidman said. He announced last month that he will step down in December, which is 6 years before the expiration of his term. Part of the reason is his Frustrated by the policy.

“In order to keep inflation expectations well anchored, we need to reiterate over and over again: If price stability needs to be maintained, the entire monetary policy must be normalized,” he said.

When the European Central Bank meets next month, it is widely expected that its flagship 1.85 trillion euro bond purchase program will expire in March 2022. Investors expect the central bank to increase its long-term assets to cushion the potential impact of the bond market purchase plan.

With a commitment not to raise interest rates before stopping purchases of major bonds, the decision next month will provide an important signal for the potential time for the first interest rate hike.

Weidman pointed out that the European Central Bank has become the largest creditor of the euro zone government after purchasing sovereign debt worth nearly one-third of the euro zone’s GDP. He said: “Central banks of various countries will increasingly bear pressure from governments and financial markets to keep their monetary policy expanded for longer than the time required by reasons for price stability.”

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