ECB keeps stimulus on track as inflation surge unsettles markets

Frankfurt

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

Hours after Spanish data showed the biggest price gains in three decades, the bank's governing council on Thursday maintained prior language, heralding plans to reduce monthly purchases from the roughly 75 billion euros (S$116.9 billion) deployed from March through September. It also promised to keep the 1.85 trillion-euro Pandemic Emergency Purchase Programme (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 policy makers will drastically pivot from extraordinary crisis support to delivering a 20 basis-points in hikes in little more than a year.

ECB President Christine Lagarde said at a press conference in Frankfurt on Thursday that the eurozone is recovering strongly from the impact of the coronavirus pandemic, but that the pace of growth was being slowed down by shortages.

"Consumers continue to be confident and their spending remains strong. But shortages of materials, equipment and labour are holding back production in some sectors," she said.

The ECB's path of continued emergency stimulus contrasts with the focus of central banks from New Zealand to the UK, which have begun raising rates or signalling plans to do so in response to rising prices across the globe stoked by higher energy costs and acute supply bottlenecks.

Many ECB officials, however, have insisted the euro area is in a different state than other advanced economies and remains reliant on support. Others have warned that inflation could indeed turn out faster than expected, and that ultra-accommodative policy should not continue for too long.

Those differing views have fuelled an increasingly vocal debate on post-crisis policy. BLOOMBERG, AFP