ECB keeps stimulus on track as inflation surge unsettles markets

[FRANKFURT] The European Central Bank (ECB) renewed its pledge to conduct emergency bond-buying at a "moderately" slower pace, holding its nerve even as surging inflation prompted investors to advance unwelcome bets for interest-rate increases.

Hours after Spanish data showed the biggest price gains in 3 decades, the Governing Council on Thursday (Oct 28) maintained prior language heralding plans to reduce monthly purchases from the roughly 75 billion euros (S$117.2 billion) deployed from March till September.

It also promised to keep the 1.85 trillion euro programme, known as PEPP, running until March 2022 or later if needed.

A decision slated as a quiet prelude to December's showdown over the future of emergency stimulus became more fraught this week when financial markets signalled disbelief at the ECB's commitment to ultra-low interest rates. Investors are now betting that policymakers will drastically pivot from extraordinary crisis support to delivering 20 basis-points in hikes in little more than a year.

With inflation now at 5.5 per cent in Spain, price expectations in the eurozone at the highest since 1993, and data in the coming 24 hours due to show acceleration elsewhere in the region, president Christine Lagarde now has the task of recalibrating the market's view.

On Thursday, policymakers also took the following decisions:

• The deposit rate remains at -0.5 per cent
• Interest rates will not rise until projections show inflation sustainably at 2 per cent and underlying price pressures are consistent with that goal
• An older asset-purchase programme continues at 20 billion euros a month
• Long-term loans to banks will continue to support lending

BLOOMBERG